花旗銀行 (C) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to Citigroup's fourth quarter and full year 2002 earnings review featuring Citigroup Chairman and CEO Sandy Weill, and CFO 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. Ptaschek, you may begin.

Thank you, operator. Thank you, everyone, for joining us today. We look forward to discussing our fourth quarter and 2002 results with you. With that, let me turn the call over to Sandy.

Sheri, thank you very much. I think from all of us, we're thrilled that we can talk about the year 2002 in the past and be looking at what we hope is going to -- what the future may look like, which I think we're very positive about.

Let me first start talking about some of the issues that affected us last year that we were able to work our way through. First, we had the problems in Latin America, the questions about the politics in Brazil and Venezuela and some other countries as well as the issues that continued to get worse in Argentina. That caused us to take charges during the year of $1.1b after taxes. Then we had in the US, corporate frauds and the largest bankruptcies in the history of country led by Worldcom and a host of others that caused us to increase our loan loss reserves by $1.4b, basically doubling our loan loss reserves. Third, we had a decline in the market for the third year in a row which caused us to lose money in our proprietary investing as well as our bond portfolios and their insurance companies and, together, those two categories cost us approximately $450m after taxes, and that is after deducting the gain from the sale of 399 Park. And finally, in -- near the end of the quarter, we set up a $1.3b after-tax reserve to handle what we expected to be regulatory settlements that related to corporate governance in the investment banking business, the IPO allocations as well as the interaction between investment banks and research departments as well as the Enron situation. Those regulatory charges, plus a reserve for our civil litigation, is -- has resulted in that $1.3b charge.

Also, we made a decision at the end of '01 and were able to execute the first part of it in '02 in selling off a part of our interest in Travelers Property Casualty, and then toward the end of the third quarter, distributing the rest of those shares to our shareholders. We had a gain on the sale of TPC of about $1.1b in the year.

Putting all these things together we ended up the year with GAAP income of nearly $15.3b, an increase of 8% over the previous year and these results give us, I think, the confidence that for the 17th year in a row the Board decided to raise the dividend which we increased by about $0.11 from $0.18 quarterly to $0.20 quarterly. We do believe that in 2002, with all these issues, we will earn more money than any other company in the world, although we don't have a market cap that's higher than all the other companies in the world yet.

But I think that what this shows is that -- really the advantage of our business model, how our corporate business and consumer business can relate to one another through the ability of collecting deposits in one and utilizing those deposits to get a better return by making loans in not just the consumer business but in the corporate business. It also, I think, very clearly showed the advantage that we have in having a high proportion of our income coming from recurring and predictable sources, which allow us to start a year with a high percentage of the earnings that we had earned in previous years. It also shows the advantage of having a diverse list of products as well as being diverse in geography so that we deal really with all the parts of the world and just about every financial services product. So, when one's down, we're going to have another one that's up. Finally, we think that we have the finest brand of any financial company on a global basis, and can really work from that strength.

Having said that, you know, all of those four things, we think, put us in a competitive position vis-a-vis whether it's our investment banking competitors or global banking competitors or card competitors or consumer competitors. We are in a better position in January 2003 to compete and grow our business than we were in January 2002. I think that that's a heck of a good strong way to come out of the year that we have been through.

Six of our nine business units had record profitability in the year that just ended. Three of those were in our consumer business which included our card business where profits were up 22% and we have over 100m customers and our profitability was above $3b. Second, was our retail banking business where in the US over the last four years we have grown deposits from $40b to $140b to help support the growth of that business and broaden the products that we offer through those branches to increase our margins and to create a better relationship with our customers, not just in the US but really on a global basis. There, too, that business had earnings of over $3b last year. Finally, our consumer finance business, again, had a double-digit increase in our profitability with gains coming from the efficiencies still coming in from associates in the United States offset in the second part of the year by an increase in loan losses in Japan, but overall doing very, very well.

The other business that we had that really, I think, did an incredible job vis-a-vis what was happening in the industry was our private bank, which also grew strong double-digits and has really put us in a very strong position globally in that business. Our revenues are about 50/50 divided between overseas and the US, and we think that that business will continue to grow double digits into the future.

Our results last year were much better than all of our competitors. Also our asset management business where, despite the fact that the market, as I mentioned before, had its third year in a row of a down cycle, we ended the year with more assets under management than we had started the year. I think it puts us in a strong position.

Finally, the sixth unit that achieved record results. We would expect that to continue into the new year is transaction services. Our corporate and investment bank had very stable revenue and profitability for the year, X'ing out the reserve that we took for the problems that I mentioned with Enron and research investment banking collaborations. With that, they were down about 33%, ex that, they were nearly flat.

But most important I think as we go to January of '03, we #1 position in investment banking revenues from fixed income and equity transactions, and we were the #2 in global M&A transactions that were announced during the year. So we think our position is really good. It's increased dramatically vis-a-vis its competitors through this down cycle. We think that it's in a position to earn extraordinary returns once that cycle begins to turn again, which it will.

During the year also, we bought back 151m shares of our stock, and in the third quarter we bought back just about enough shares to completely cover the shares that we needed to pay for the Golden State acquisition.

Finally, yesterday, the Financial Times had a section on the most respected companies in the world, and they reviewed 1,000 companies to come up with that. I think that living in New York, we were wondering when that came out, what it might look like. While we didn't like going down, our Company was still the 15th most respected company on a global basis. That's down from #10 the previous year, not a very big drop. We with the #1 most respected company in financial services for the fourth year in a row. We were the 10th most effective company in creating value for shareholders, and that's something that's important to all of us. Than didn't move much from being 8th a year ago. Finally, the Financial Times came up with a new category which evaluated the companies with the most integrity, that people thought had the most integrity, and our Company was #11 in that ranking.

So I think overall in coming through a bear market and a bad period, the respectability and the how people feel about our brand, I think, will enhance our ability to deliver very good results.

Finally, and I think this is as important as any, Citigroup was reaffirmed as a component of the Dow Jones sustainability world index for 2003. This is an index that recognizes companies that rank in the top 10% of all companies, demonstrating superior environmental, social, and economic performance. I think that's going to become even more important a standard as we think about how we are going to grow our business in the 100 countries in which we operate and our being a company that is respected for really making a contribution to the community and helping that community be an even better place.

So I think that when you look at all these things, we look to '03 as entering that period with a very strong competitive position. And some of the reasons -- additional reasons, why I think we have a strong competitive position is we start the new year with possibly $93b in equity. That's a multiple of what a lot of our major competitors have, and substantially more than any competitor has.

Our ratings are another strategic advantage for our Company, where we are AA1 and AA+ with Moody's and Fitch and AA- with S&P. Again ratings from a global basis that are stronger than any of our broad-based competitors. I think our management team is stronger today than it has ever been. We have moved people to different positions so that people are broadening their knowledge of the Company and we have attracted five very senior people to our company in the last four months that will only enhance our ability to manage and grow this Company.

I think when we think about the opportunities that we have in our consumer business going forward and the opportunities to grow those businesses in emerging markets, I think we're excited about the fact that we're starting an Internet consumer business in Russia. I was in Russia just before Christmas and there was a lot more merchandise in the stores than there was In Paris, where I went to next. A lot more activity of merchandise leaving the store after being paid for in Moscow than what was happening In Paris. The country has made an incredible turnaround, I think, and hopefully that continues.

Just as the year, ended after working on it for two years, we signed an agreement with Shanghai Pudon Development Bank where we made a strategic investment in that company, but also important we set up a venture in credit cards where we will have 50% of the economic interest and look to take the technology of what we have, which is the best credit card business in the world, and utilize that technology with the connections that Shanghai Pudon Bank has in China to begin to grow that business and it allows to us begin this process four years before we could have done it on our own if we waited for the whole WTO process to kick in. So those are the kinds of things that we look at as we think about how we are going to grow our business.

I think in the US, we feel good about the concept of our growing our branch system. The EAB deal was done very, very well. We are now in the process of integrating Golden State, which we hope all the operations will be integrated by the end of the first quarter. Once we get that behind us, I think we'll think about, should be we be looking at other opportunities, because we are very interested in what we can do in enhancing our position in Hispanic banking on this side of the border and working that together with what we are doing with Banamex on the other side of the border.

We see, as we start this new year, credit quality continuing to stabilize. We have seen that for the second quarter in the consumer business, and based on looking at the numbers of 90-day delinquencies, as well as write-offs, we would expect stability in the first six months of the new year. We added to our portfolio $35b of assets in the fourth quarter that came from Golden State, the great preponderance of those assets are in mortgages which have far lower write-offs than do the basic lending business, and thus require substantially lower levels of reserves than would our basic lending business, although our reserves to non-performing loans in the consumer business, I believe, increased period over period.

Finally, from the point of view of corporate governance, we have said that we are going to expense stock options. That will cost us $0.03 cents a share in 2003. We have cut our pension accrued rate to 8% down from 9.5% and are basically fully funded in our pension at the end of 2002. The lowering of that accrual rate will cost us about $0.02 a share in 2003, and with all of that, and Todd will go into a little more detail, we expect our earnings to be up double-digit year on year '03 over '02.

Also, we have decided to eliminate interlocking directorships as something that relates to good corporate governance. We are going to report our earnings going forward on strictly a GAAP basis so that everything will be included. I don't know when the SEC may get there or the FASB. But that appears to be the direction, rather than having 20 different hypothetical things that a company can think about, about how they report their earnings. We will report plain GAAP.

Also, we have an ownership commitment among our management that I think is stronger than what you would find in any company where all of us have to keep at least 75% of the stock that we get from the exercise of options as well as restricted stock as long as once we achieve a minimum level and we have to keep that amount of stock as long as we stay with the Company. So it gets to us think very long term.

I think that our position as one thinks about what's going to happen around the world and hopefully we have peace rather than war, but when we do have peace, I think we will see more trade that will help develop middle classes in a lot of these countries in which we do business. We are going to focus on some of the larger ones to really grow our business. We think that the opportunity in financial services has a great growth environment and the kind of world that we are in is really exciting and that our position with the most recognized brand, with the balance sheet, with the diversity, with our recurring income, give us a position to really continue to show double-digit growth as far as the eye can see out into the future.

With that I'd like to wish everybody a Happy New Year. For me personally, I hope it's a better one. My health is a hell of a lot better. For those of you that count my weight, it still continues to go down.

With that I'll turn it over to Todd.

Thanks, Sandy.

For those of you who know Sandy well know that he is pretty tight with a penny. He has actually now taken his suits and taken them to the tailor and paid to have them taken in! So I think this is a permanent change in his weight.

I'm going to walk through our presentation which should be up on the webcast. That will summarize 2002 fourth quarter results and the outlook for 2003, and then both Sandy and I will be here to answer questions. Frankly, 2002 is a year that many of us are happy to get behind us.

That said if you turn to page 3 in the presentation, which should be up on the webcast now, full year financial performance was quite strong. Let me start from the bottom of the page. Diluted net earnings per share of $2.94, GAAP net income of $15.276b after-tax. Up 8% on both those numbers. Revenues were actually up 7% for the year. So not only decent bottomline growth, but good top-line growth as well.

As you work up the page you can see that for the year we had discontinued operations was a positive as the TAP IPO gain and as well as the income for Travelers Property Casualty while they were still part of the company provided some income, obviously none of that will exist next year. We had some small accounting change issues and then some insurance realized losses this year of $215m. So, taking those out you get to our core income number which as Sandy talked about we will be eliminating for next year. Since that's the operating number that a lot of the analyst and us focused on previously, it's still in here. $2.63 for the year, $13.65b, up 2% from last year.

Let's go to the top of the page there, Global Consumer business obviously was a standout for the year up 21%. $8.4b for that segment alone in income. Revenues for that business were up 15% on the year. So again, very strong both top line and bottom line growth.

Global Corporate investment bank, which includes the $1.5b after-tax charge that we took earlier this quarter, was down 33%. Still $3b of income. Revenues in that business were down 3%. I'll go into more detail on the business later on.

Private client services down 7%. Investment management up 13%. Very strong performance especially relative to competition investment management. Private bank there was a standout for the year. Investment activity was a negative for the year. And that was a result of some additional write-downs and write-offs that we took in the emerging markets as well as the very tough marketplace we had for both the Nasdaq and the S&P which brought down the valuations of our public portfolio there. So that was a negative for the year.

Corporate "other" was a negative 93, which is obviously a much smaller cost than what we saw in the previous year of 637. And the reason for that as we talked about throughout the year is interest costs have come down substantially with the rate cuts and in addition, we had positions for those rate cuts so took advantage of some positioning gains in our treasury. So that was a very good performance in treasury and therefore in corporate "other" for the year.

Let me turn to page 4, next page. Obviously, a very tough year. No matter if you looked at markets, credit, volumes, international, everything was tough. We clearly were not pleased with how our stock price performed nor are we satisfied with the fourth quarter numbers we are delivering here. But I think we have proved that we could manage through a tough time.

I think we're very proud to actually come out of 2002 in better shape than we went in. I have a list here of some of the achievements of the year. In addition to the record earnings in revenues, we have record income in six of our nine businesses. We did complete the IPO and the spinoff of Travelers Property Casualty so refocusing our capital on what we feel our higher return, higher growth businesses for our shareholders. We added $1.5b to loan loss reserves, about $450m of that was from the acquisition of Golden State.

We repurchased 151m shares for $5.5b so as we felt the stock price declined to levels that were quite low, we took the opportunity to repurchase those shares to the benefit of our shareholders. Despite those moves, stockholders equity was actually up $4.5b to $93b in total including our trust preferred. Our capital ratios both tier one and total capital improved during the year. We achieved a rating upgrade from Fitch to AA+. Maintained our strong ratings from Moody's at AA1 and from S&P at AA-. So, very tough year but we come out of it, I think, in better shape than the way we went in and in good shape to take on 2003.

Let me talk about the quarter a bit on page 5. Again, starting from the bottom, net income of $2.4b, $0.47 a share, not much difference between core and net in this case. There was a small restructuring item for the acquisition of Golden State of $14m, so core EPS was also $0.47 a share, led by the consumer segment up 26%.

Corporate Investment Bank was negative $344m. Again, that includes the $1.3b litigation charge as well as the increase in the corporate reserves. Private Client Service had a very tough quarter as a result of their managed account business, which is priced based on the asset value at the beginning of the quarter. That was priced based on the market values as of the end of September which was essentially the low for the year. So that hurt revenues in the business and transactions were also down a bit. So income was down 19%. Investment management was up 5%. Investment activities was a slight negative. You'll see that fourth quarter last year we obviously had a very strong positive as the markets bounced back from the lows of last year's September 11th crisis.

Then corporate "other," at $105m, what I would consider a sort of a more normalized quarterly number for corporate "other" -- until we get some interest rate increases, and that number will move up as we get to the second half of next year, I would guess.

Let me get into some more detail on the business performance and outlook by segment, starting with Global Consumer on page 6. Global Consumer consists of three businesses: cards, consumer finance and retail banking. Globally, as you can see, each one of these businesses performed extremely strongly in the quarter. Cards up 30%, consumer finance up 15%, and retail banking up 25%. Not only record income for each one of these, but also record revenues up 13, 12 and 10, respectively.

Expenses were managed flat in both the cards and consumer finance businesses, up slightly, up 7% in retail banking. Managed receivables and loans and deposits are also growing strongly. So, strong performance across the board there. You see the full year performance for cards was up 22%, 21%.

For '03, what we expect for the business is continued strong receivables growth the second half of the year. Receivables growth is pretty good. We are marketing strongly again and we feel like we'll continue to see strong growth there. We'll also have, toward the second half of '03 the closing of the Home Depot deal which will add $7.5b to our receivables at the end of July.

Credit costs in cards we expect to be essentially flat. On NCL percentage basis to this year and so for the business for the full year we expect to see on going double-digit income growth in our global cards business. In consumer finance, which is up 15% this year, we expect credit costs to trend a bit higher. As we have talked about, the credit curve for consumer finance tends to lag a little bit net of the cards business. A lot of this business is real estate-secured and so it goes delinquent later and you see losses at a lower level than later on in the cycle. But we do expect credit costs to trend higher. We will have a continued focus on expenses, especially in Japan where we have seen credit costs up a lot so we are cutting back on origination and also focusing on expenses there. We would expect to see more like single digit income growth in that business for 2003.

Retail banking, income was up 25% in '02. For '03, obviously we'll be focused on the integration of Golden State. We expect to see improving margins out of the business and we would expect to deliver strong double-digit income growth in '03, as well.

Let me move to corporate and investment bank. Two businesses there: capital markets, and banking and transactions services. We also have an "other" line that you'll see in our press release. The "other" line is where the litigation charge sits. So you don't see it in these two segments here.

Capital markets and banking was up 9% versus the tough fourth quarter last year although revenues were down 13% in this quarter from last year, expenses were down even further as we trued up incentive comp for the year and have continued to work on other expense items over the year, as well. So they -- we saw good comparison in the fourth quarter.

Market shares remain strong. The fifth consecutive quarter that we have been number one in debt and equity underwriting and the fourth consecutive quarter number one in disclosed fees. In terms of revenues, fixed income was down from last year, lower risk treasury and tough FX trading. Equities is also down. We had some losses on US derivatives. And investment banking was down also fairly significantly as both advisory and underwriting activity was weak in the quarter.

Let me talk about some of the GAAP P&L revenue items a little bit which includes not only capital markets and banking but also private client. Commissions and fees were relatively flat, not much change there. Asset management was down a bit as you might expect as the market values have come down from last year. That was offset a bit by positive inflows but market values were down more than the inflows year on year. Investment banking was down 21%, again, as I already spoke about lower advisory fees and lower underwriting for the markets. Principal transactions was down 15% from last year and significantly QonQ. that was primarily driven by mark-to-market losses on credit derivatives in this quarter as credit spreads came in significantly, and last quarter credit spreads blew out significantly. So we had significant gains in credit derivatives last quarter, losses this quarter.

We also had lower performance in US equities, and in addition in principal transactions we had strengthening of the Brazilian real which meant that our interest and dividends, our out of Brazil was up significantly, and as we hedge that interest, principal transaction was down essentially the same amount. So there was a swing between interest and dividends and principal transactions that occurred as a result of the strengthening of the real.

We did, as I mentioned, true up compensation this quarter so that for the full year, risk adjusted comp was 43.7% of revenues versus 44.9% last year. So down a bit. This year, I think that partially reflects the cost of the litigation as well, that some of which ends up being borne by lower comp. For the quarter, the risk adjusted comp was down at 37.6%.

Capital markets rankings on the next page, you can see that we continue to have very strong rankings. Debt and equity #1. Investment grade debt #1. We improved in global equity from 11.4 per share to 13.1. Came in #2 for the full year of 2002 and announced M&A also up to #2.

Private client services on page 9, income down 19% as we talked about. Net flows for the year, though, were very positive, up $35b, so continued strong performance by this group and again a very tough environment. For 2003, we would expect to see revenue improvement over 2002, continued focus on expenses, and do expect the business to have double-digit income growth off of what was obviously a depressed 2002.

Investment management, page 10. Life insurance annuities, we have had the expenses up primarily as a result of the increased deferred acquisition costs as we now have to amortize at a higher level. And if you look out toward '03, we would expect to see continued flat income growth in this business as this DAC change will continue to hurt revenue -- I mean expense comparisons but we should see improved volumes in the business.

Private bank was up 24% in the quarter. 23% for the year. We see continued revenue momentum in that business, continue to focus on productivity and would expect to see continued double-digit income growth in that business.

Asset management up 2% for the quarter, revenues were down, expenses also down. Again, strong net flows for this business, $12.3b in the quarter and $35b for the year.

We would expect, as we look out to '03, continued strong net flows as this business continues to outcompete its competition. Moderating market pressures, we don't foresee the same kind of decline in the markets that we saw in 2002, and we would expect to see double-digit income growth in asset management as well.

On page 11, you look at the same business, but on a regional basis, you can see for the quarter, Mexico is quite strong, up 50% as we continue to have good revenue performance and a lot of expense take-out in that business. Western Europe up 11%, which was very strong consumer performance offset by the same corporate issues you see in Western Europe that would you expect in the US, which is tough credit environment and low volumes. Japan is negative, which is primarily a result of a negative in the consumer finance business. Then Latin America was a slight positive this quarter, versus the slight negative last year.

Let me talk a little bit about our leverage. You can see on page 12 our revenue and expense, QonQ, and for the full year, which is the right hand bar, this excludes proprietary investment activities. So revenue was actually up 8%, excluding investment activities. Expense was up 3%. If you subtract out the legal charge, the $1.3b legal charge, expense was actually down 2%. For the quarter, revenue was up 4% and expense was up 15%. Or actually down 6%, ex the charge. So continued very strong focus on making sure that our expenses are well managed and we keep an eye on that topline growth, as well. We were looking, as we said last year at this time, to achieve $1b of expense saved on a run rate basis by the fourth quarter which we have achieved.

Let me talk a little bit about credit. First consumer credit. You can see that NCLs as a percentage of average loans is down to 2.98% for the fourth quarter. We talked about last quarter, that outlook being pretty flattish through fourth quarter and the first half of the year. In fact, if you adjust for the acquisition of GSB, which came on to our books this quarter, the fourth quarter NCL percent would be 3.14%. So would you see a decline of 3.19% to 3.14%, again relatively flattish. Obviously, the Golden State book has a preponderance of mortgages so you have a lower loss rate there. So that mix gives you perhaps a little better performance on the slide than is actually there. We would expect, again, continued flattish performance on loss rates into the first half of the year.

In terms of 90-days past due if you make the adjustment for a GSB, delinquencies would be 2.30 for the fourth quarter so, again, slight improvement but relatively flat to third quarter.

Let me move to corporate credit. Obviously, credit losses in the quarter remained high. The good news is that cash basis loans began to flatten. You can see the cash basis loans as a percent of loans is up to 3.57, only a slight increase from last quarter's 3.50. So, we feel like we're beginning to see the top of corporate credit losses and as we look out to 2003, we would expect to see flat to improving credit costs from what we have seen in 2002 on the corporate side.

I wanted to spend a minute on the reserves for credit losses. And if you look on page 15, you can see we began the year at $10.1b of total reserves. And we ended the year, which is the far right hand bar, at $11.7b. So we're up $1.52b in reserves. That consisted of, in the first three quarters, we added $276m to consumer reserves, and $450m -- sorry, $372m to corporate reserves. That got us to September 30. In this past quarter, we added another $82m to consumer reserves plus $450m for Golden State. We added $263m to corporate reserves. So, we feel very good about our consumer and our corporate reserve positions as we head into 2003.

I did want to highlight for everybody our merchant energy exposure. What this consists of is our pure merchant energy exposure plus any exposure we have to the integrated operators who have created merchant energy operations. So I think a broad view of merchant energy exposure. And as you can see, in total, we have $4.5b of gross credit exposure which is $2.5b direct outstanding, a little bit of contingent exposure which is mostly Letters of Credit. We have unused commitments of $1.4b and then a small amount of pre-settlement risk. This is a group, which is not particularly investment grade. A number of them -- some of them were investment grade but got downgraded but today, not really investment grade group.

However, we are mostly secured in these credits and in addition to 55% secured overall, or what I think is more important 63% secured on the direct outstandings, we have another $800m or $900m of credit derivative protection against this book as well as a significant amount of reserves put up against us at this point. It's the concern we had about this segment that caused us to put up some additional reserves in the fourth quarter in our corporate credit book and we feel as we head into '03 that this is in pretty good shape, well reserved, and well protected. The losses that we'll see out of here I think are within the budget that we have for 2003.

Golden State Bancorp on page 17, it was accretive to our earnings for the quarter by about $0.015 and obviously the integration is on track. We expect to see branch conversions completed by the end of the first quarter.

Capital on page 18, total stock held as equity up to $93b return despite the difficult year we have had and the charge we totaled $18.5m -- 18.5%, sorry, for the year. Tier one ratios and total capital ratios remain quite strong. We did, during the quarter, issue 79.5m shares for the Golden State acquisition as well.

Let me go to the outlook for 2003. On page 19, continuing to focus on maximizing shareholder value so we are --number one what that means for us is outcompeting on a business-by-basis, the competition. Leading global product positions, having expense discipline, leveraging the funding cost benefits we have as a company, driving leading margins and returns on a business-by-business basis.

We already have global leadership positions in cards, consumer finance, the corporate investment bank, the private bank and private client businesses. We are continuing to invest to build that same position in retail banking transaction services, asset management and life insurance.

It also means efficient capital allocation so investing for growth and returns getting out of those businesses where we're not going to have leading positions that don't have the kind of growth in return characteristics that we want to have with our businesses. Leveraging a distribution network and a brand that is second to none. For the year, we had characteristics that we want to have with our businesses. Leveraging a distribution network and a brand that is marketing revenues that were 20% of our total revenues which were up 30% from last year. So we continue to leverage the distribution channels that we have in this company extremely effectively to drive better performance for each one of our businesses. Then finally, management discipline. We want to operate this place to a higher standard than anyone else. That will lead to a continued position of the global leader in financial services, maintaining our double-digit earnings growth and industry leading ROE into the future.

Now, let me spend a minute on what we mean by double-digit earnings growth and off of what base. There was a question on the call that we had when we announced the charge earlier in the quarter. So on page 20, I thought I'd lay out from our perspective the base that people should be thinking about to grow from and if you look at the -- on page 20, the left hand bar, $2.94 a share in net, it was $2.63 in core. If you take the $2.94 and you take out discontinued operations, you take out the IPO gains you take out the earnings that we got from Travelers Property Casualty, which obviously is no longer part of our business, but has been spun off to shareholders, that would be $0.35 a share. So if you take that out, and then you add back the charge that we took in the fourth quarter, for both legal and credit, so $0.29 a share, that gives you a base of $2.88 a share. We would expect to have double-digit earnings growth off that base including additional costs in 2003 for expensing options which is about $0.03 and the pension rate reduction which is about $0.02.

With that, why don't we open it up for questions.

At this time, we are ready to begin the question-and-answer session,. If you would like to ask a question, please press star 1 on your touch-tone phone. You will be announced prior to asking your question. To withdraw your question, you may press *2. Once again, if you would like to ask a question, please press star 1on your touch-tone phone. Our first question comes from Richard Strauss from Goldman Sachs. Sir, you may ask your question.

Okay. Thank you.

Good afternoon, Richard.

Hey, how are you. Just looking at, you know, expense trends, I mean, you've obviously, you know, you've taken out quite a bit more on the card side but there looks to be perhaps some evidence that it's hard to take some more expenses out of some of these areas. For instance, asset management the margin went from 40% to 36%, expenses were up, taking out the charge at Salomon Smith Barney, it looks like non-comp went up almost 300 basis points there. And in the card business, actually you had further gains. So your expenses over average managed loaned went all the way down to 351 which really is the best it's been I think in 8 quarters, but I guess the question is how much lower can that go?

I know you have GSB, and that closed in the beginning of November. And I think a couple of pennies are going to come from there. But it looks like most of the expense upside is really going to come from GCIB. Can you just go over some of the dynamics regarding that?

Yeah. I think there's a couple of specific opportunities but before I get into that I think in general, the real focus we have is on operating leverage. So if you look business by business, those businesses that, where we think there is a good revenue environment for them, we want to make sure it invests in them appropriately to take advantage of that growth opportunity. Those where you are going to see some very tough revenue situations this year obviously corporate investment bank was one, the private client business was another. We are going to work very hard to make sure that we are taking costs out of those businesses. I think that's how we think about managing the business and that's how we think about managing costs. And the results should be that we have a positive operating leverage in each of our businesses on an on going basis, and that's really the focus.

In terms of specific cost opportunities next year, I do think we have more opportunities in a number of places. We're always finding -- we have a big expense base. We are always finding additional things to cut out at corporate and with technology and operations. That's always a focus. We have a first class group of people that do that. In addition, I think the transaction services business is one that we have seen some good cost take-out this year. I think we'll see even more come out next year.

So on what will probably be a relatively flat revenue growth for the business, I think you'll see double-digit income growth because of continued cost takeouts. I think Golden State gives us some opportunity in the retail banking segments to take some costs out and I think in the consumer finance business, both in Japan and in the US, the business is focused on making sure that we have got the right level of costs there and more opportunity in both those places.

Okay. Sandy, I think you said --

Richard, I apologize. Sandy just stepped out.

Oh, okay. All right, then, just one more question for you, Todd. Just in fixed income, you know, I know you mentioned the credit derivatives. So you obviously, you know, suffered the brunt of the improving spreads on your credit derivatives portfolio but even so, it looked like there was about a 15% decline in fixed income trading. You know, the primary markets rebounded to some extent. We think that would be driving, you know, the secondary markets. It still looked a little weak. Can you just give us some more color there?

Yeah. The other difference was we had a very good -- are you talking about third quarter to fourth quarter?

Yes.

Yeah. Third quarter we had some very good FX positioning on the dollar and so we had some good -- that shows up in our fixed income numbers, some very good positives last quarter from that. And actually, this quarter didn't have that benefit actually had a little bit worse performance on FX trading. So that's primarily the difference.

Okay. Thank you.

Yup.

Thank you. Glen Shorr from Deutsche Bank, you may ask your question.

Thanks very much. Hey, Todd.

Good afternoon, Glen.

All righty. Kind of touching on similar topics, speaking of trading, I'm more focused on the equities side. You've got two quarters in a row with a modest negative. If you can just give a little color on cash versus derivative, and why that might be, and if there is any other pieces of the business that that might be related to.

It's really mostly derivative equity trading that was -- is the negative. And without getting into too much of the details, I think for the most part these guys were on the wrong side of the ball. And that's most of it.

I think the other thing that's been happening is spreads in Nasdaq have come down a bit. So that's hurting the trading revenue, as well.

Okay. Fair enough. And then on the currency side, more related towards -- Western Europe and CEMEA really just had excellent quarters especially sequentially if you look at it, and I guess Japan has continued to be weak. Can you help us break down how much of it is underlying fundamentals and what benefit there might have been for a weakening dollar versus the yen -- I'm sorry, weakening dollar versus the euro and strengthening versus the yen?

Yeah, I think, in the Europe results, CEMEA and Western Europe, was weakening dollar there certainly gave some bump, not a huge bump but some bump to those numbers. But we had good consumer performance the credit card is doing very well in CEMEA as well. So that also helps CEMEA's results. In Japan the weakening yen hurt us a little bit, but we were pretty fully hedged on the yen. So that didn't really damage results too much.

Then just final question, just clarification point. The decrease in consumer reserve to loans, that is entirely a function of the GSB mix?

Yes.

Okay. Great. Super. Thanks very much.

Thank you.

Your next question comes from Judah Kraushaar from Merrill Lynch. You may ask your question.

Hi,,Todd. Two or three consumer business questions. Your double-digit outlook for growth in credit cards. I'm curious, what type of revenue assumption you are making there and whether you assume that this is going to be more of a year of expense leverage versus revenue growth? It just seems with consumers seemingly tapped out and the margin benefits behind, I'd just like you to maybe talk to the risk in a double-digit forecast; and then secondly, the outlook for single-digit growth in consumer finance earnings, I'm curious what it's going to take to get that business longer term back up over double-digit growth, whether this is just a soft part of the cycle or whether there's something structural going on.

Lastly, you or Sandy made a reference that after the GSB consolidation is done in the first quarter you are going to be looking pretty activity for more acquisitions and I'm curious what you're thinking of and how important Texas is to the Hispanic strategy.

Okay. Three parts of that let me try to take the last one first.

You know, I think we want to as with all of our businesses that are doing acquisitions make sure we integrate GSB well first before we jump on to something else and I think that will be -- the systems will be integrated and the signs will be up and everything will be Citibank by the end of this quarter. But I think it will take a few more months after that to really make sure that things are operating as we expect. But I do think that we've, you know, we have said all along that with the acquisition of EAB and the acquisition of GSB that we are clearly looking at continuing to build out this retail banking franchise around the US. We would like to do that in areas where we already operate because we operate I think in the best areas to have retail banks. With the possible exception as you mentioned of Texas, which is one of the important places we just don't happen to have a business there right now. It is important from a Hispanic marketing point of view. And that's something that we'll be addressing at least with our Hispanic strategy but whether we want to expand up from Banamex in Mexico or do something organically or buy something, we'll have to take a look at that.

But I think as we look out toward the rest of the year, we'll be, I think, looking at continuing to find ways of building that franchise once we feel like we have GSB, you know, safely under our belts.

In terms of the consumer finance business, I think the main issue in terms of income growth at this point is we are at a part of the cycle now where, you know, credit is trending up and receivable growth, however, has been pretty decent. So there are two things that are keeping that business from being double-digit at this point in terms of income growth. One is that trending up of credit costs which will turn around and come down at some point and that will help. Then secondly, what's going on in Japan -- where we have bankruptcies that are that are at record highs in Japan that were taking loss rates in that business that are, you know, quite high.

We've turned off a lot of the marketing and increased the scores at which we'll take customers in Japan so the growth rates, you know, down as we have tried to manage it down to make sure that we're only bringing in good business. Then we are focused on making sure we take costs out of the business. So I think, you know, those are the two reasons why it's not something that we would think in 2003 will be double-digit growth. But I think as we get those issues fixed, I think on an on going basis, we would expect that to be a continual double-digit growth business. If you look at the history of that business over any length of time, that's been its performance.

You had one other -- oh, cards. In the cards business, I think the expectation the business will have for this year in terms of revenues probably sort of decent single-digit growth rate in revenue on a global basis and, you know, I think that business is a very strong business. We are the lowest-cost operator out there. We have the opportunity, I think, to continue to take share from others, both in the US and overseas. And I think in terms of acquisitions that's another place that we will continue to look for portfolios or cards businesses in the US and overseas to acquire.

Okay. But if you are saying single digit revenue growth and double-digit earnings growth with a flattening growth you are assuming for some positive operating leverage there as well?

Yes.

Okay. One other thing, Todd and I'll let others ask. I'm just curious on the corporate investment bank, you finished the year with under a 44% comp ratio. If '03 is a, you know, somewhat of a recovery year, what's your thoughts in terms of comp ratio to target especially since you had a very low fourth quarter accrual?

I think if you look at the risk adjusted comp ratio, -- for the year, as you said under 44%, it's 43.7% last year was 44.9%, so we're down, you know, 1.2 points from last year. That might be a little bit low on this measure because as I said, you know, some of the costs of these legal reserves we have put up was in effect borne by people in the business so that, you know, we're now past that. So that now, hopefully, we had ended 2003 with a clean slate. I think something in the 44% range for risk-adjusted revenues is a pretty reasonable target for us. It's not, you know, sort of on what we have been at for a while. What I do expect though, is as we would see credit costs hopefully improve, during the year, that that will give more actual dollars to pay out to comp.

Okay. Thanks, Todd.

Thank you, Judah.

Thank you, Steve Eisemann from Chilton, you may ask your question.

Yeah, hi. Just a quick question on the life insurance variable annuity business. Can you just review again with what your DAC assumptions and where you are in terms of those assumptions today?

I'm not going to be able to give you the details on the DAC, you know, piece by piece.

I'm just interested in the equity variable annuity.

Yeah, that's a -- yeah, the assumptions behind that are not something that we would typically disclose, and there is a relatively complicated answer to that question. I think the -- let me talk a little bit about how we go about it, which is, once a year we take a look at what the balances are and the expected life of those customers and expected profitability of those customers and based on that analysis, we adjust what the DAC costs, the deferred acquisition costs, are that we are going to amortize over that period of time. And we do this in a way which is called FAS 91, which means that we then over the remaining life of that customer, change the amortization schedule so that rather than taking what some others would do under a different FAS, rather than taking a one-time charge, that cost -- that increased cost gets amortized over a period of time. So we'll have tough comparisons for all of next year on expenses in that business.

I guess my question is just aimed at just about everybody in life insurance world has taken a DAC write-off of one type or in 2002. It seems, except for you. I'm just trying to figure out why.

The reason is because under FAS 91, which again is a different approach than some others have used, we don't believe in taking a one-time charge. So we adjust that over a period of time.

What does that -- what is that period of time?

It depends on the actual length of each of the customers, the profitability of each customer that we have on the book there. But that will be, you know, from a comparison point of view it will be a tough comparison, 2003 versus 2002, but when you head into 2004, that will no longer be the case.

Just one quick question. Why do you use FAS 91 and everybody else uses something else?

In our view, at the time, it was a more conservative approach to use. And that's what we have always used. So if you are in a period of a rising market and customers are becoming more profitable, you know, it's a more conservative thing to do. And we didn't -- we don't believe in taking that as a one-time charge.

Okay. Thanks.

Yup.

Thank you. Diane Glossman from UBS Warburg, you may ask your question.

Hey, Todd.

Hi, Diane.

Couple questions for you. First relates to Mexico. If you look on a sequential quarter basis, your revenues ticked down quite a bit but there was relatively little change in your core income. Can you talk about what's happening between those?

Sure.

Also, just harking back a minute to the life insurance business and PFS, these are two businesses that have really been quite slow growers apart from the DAC issue. Could you talk about what you're doing there in order to gen up the growth in the business, recognizing that the life business is hampered by what's going on in the equity markets.

Sure. First on Mexico, I think most of the difference in Mexico is weakening of the peso over that period of time. So the peso I think is down, you know, + or -, 10% or so from last year. So that obviously affects both revenues and expenses. It affects income less. So that's been a big piece of that. We also had some very strong trading results as the interest rates were coming down in the fourth quarter of last year and that benefited us in revenues for fourth quarter of last year. So that's most of the revenue story in Mexico.

But how about on a linked quarter basis? -- on a linked quarter basis you went from 530 to 454.

Yes. That's down, as well. That is primarily a lowered sales and trading number for Mexico for this quarter versus last quarter.

Okay.

The -- your other question was on the growth of the insurance businesses. I think there actually is a bit of a different story. PFS, you know, has a life business and that was sort of its beginning. But the way it works now for the Company is it's really a distribution channel for a number of our products. So it's been driving some of the growth that we have seen in our asset management flows. It's been driving some of the growth that we see in our consumer finance lending business.

It's a terrific distribution channel for a broad range of our products, drives a lot of that growth. But it has an overhang which is a very big life book that doesn't tend to grow that fast. If you disaggregated those two things, you would see the distribution piece of this is growing quite quickly and the life piece of this has been pretty steady.

The way we're trying to address that is, we certainly don't want to do anything but encourage the productivity PFS as a distribution channel so we are continuing to work with that channel, with additional products and work closely to continue to drive more sales, which also helps PFS's performance, but also they are now beginning to see some more growth in life sales as well, which will be helpful to the business.

That's a little bit different story than what you see in our life insurance and annuities business where, you know, it's really primarily an annuities business and primarily a variable annuities business, so as the markets have come down, you have seen a lot of redemptions. You've seen very little sales going on in variable annuities, the market has moved fixed annuities, which is not traditionally the strength of this business, and has moved, you know, proportionally more toward life. And so we are addressing that by focusing on fixed annuities, as well. The business has also had an effort to develop third party channels so they can grow in third party distribution as well as through Citi's distribution. And they have had a focus on beginning to build the life sales as well in that business. And that's how we have addressed it.

The other, you know, big reason for the decline or the flat performance, if you will, in the income of the business is, as actually less the equity market, more what's happened to interest rates, most of the investment portfolios in fixed income instruments and has an average life of about 4 1/2 years, and so what that means is 20 to 25% of that fixed income investment is turning over every year and what we have seen in the last couple of years is reinvesting what had been relatively high yield fixed income instruments in now pretty low yield fixed income instruments that we have seen, you know, a lot of fixed income instruments are now at sort of record lows in three, five and ten years. So that's caused a net investment income out of that business to be much lower on a year-on-year comparison basis. That's not going to improve until you start seeing rates move back up -- which, at least if you look at the credit curves, people would expect to see towards the back half of this year and into next year.

Okay. Last question for you, Todd. You mentioned trying to pare back on non-core operations. Would you consider the auto business of GSB to be non-core, given what you did with the Citibank auto book, or are there other portfolios we may be thinking about in that genre?

We have, you know, over this past year looked at a number of some of the smaller portfolios of things that we do, you know, things like the mortgage portfolio of Japan which we talked about last quarter, we sold out of, a number of auto financing businesses around the world that we've sold or gotten out of. And there are certainly more of those that we're looking at to see whether, in fact, that is something where it's got the growth and the return characteristics that we like as well as something that we can be a leader in. And you know, if it's not something we can be a leader in or it's not something that has the growth and return characteristics that we want, then we would definitely look at exiting it in some way.

Thanks.

Thank you.

Thank you. Mike Mayo from Prudential Securities, you may ask your question.

Hi, Todd.

Hi, Mike.

Could you give a quick overview of your expectations by region, that was a nice overview by business line, but just areas for relative strength North America, Mexico, Western Europe, et cetera?

I think, yeah, let me try to do that. I think Latin America we actually would expect to do better off of what was clearly a miserable 2002. I think in North America we would expect some decent performance, something along the lines that we saw this year ex the charge. So double-digit growth I think in the US.

I think Japan will have continued tough time, hopefully some decent performance in the corporate side, but we would expect, again, continued tough performance in the consumer finance business in Japan. And so that region will probably be pretty tough.

I would expect pretty decent performance out of both the consumer and corporate business in Asia. I think in Europe, we'll have continued strong consumer performance and I would expect to see a turnaround in the corporate business as write-offs should come down a bit and we should start seeing some more volumes in the investment banking business in Europe.

And Mexico? Especially given your prior answer about the retail.

I think Mexico had strong performance this year. We've got rates that have come down significantly in Mexico. I think we'll have, you know, some growth there but probably single-digit growth off of this year.

All right. Thank you.

Thank you.

Thank you. Henry McVey from Morgan Stanley you may ask your question.

Good afternoon.

Hey, Henry.

Couple questions. One is you provided the merchant energy but last quarter you had actually given us a breakdown of Telco which was a bigger exposure, I think it was $6.5b direct exposures and $11.5 unfunded. Can you just update that for year-end?

Yeah. For year-end, it's... hold on one second. Yeah. For year-end, what's happened is some of the unused commitments have been used and so direct outstandings that were up very slightly, and unused commitments were down fairly significantly. So in the things that are, you know, potentially of risk, exposure has come down a bit in those. Also seeing some additional write-offs that we have taken, some additional reserves we have put up for telecom. So, in general, I would say slightly less exposure and fairly significantly less exposure in the unused commitments.

So is that less -- slightly less than 10%?

That's right.

The other thing, just last quarter you had in the back $251m in receivables related to Argentina. That disappeared this quarter. And then I was just trying to figure out what your net exposure now was to Argentina. Did you write that stuff off or what happened?

In general, the Argentina exposure continues to come down, most of what we have down there is, you know, frankly in runoff mode.

Right. But the last we had -- I went back, the last that we have publicly was $1.3b in the first quarter -- in equity and then the thing we could see from the third quarter is that you had $250m. The only thing we could tell was in the on page 27 was the "other" it was a receivable and so I'm just trying to get an update on what's left if you could either tell us where the equity is or the receivables, we can try to back into something.

There was a receivable and it's now gone. It's a combination of something that was actually recovered and paid or written off.

Okay. And what's the equity position?

The equity position we haven't disclosed what that is right now. But you can imagine it's come down. I think the risk there Henry, if I can --

Okay.

-- is frankly not the equity position and not really credit at this point. I feel actually very good about the credit position given the amount of reserves we have up on both the corporate and consumer side. The risks in Argentina now is this what's called the Imparas issue which is where judges on an individual basis are going in with individual depositors and requiring banks to give them back their deposits at the original dollar rate as opposed to the, you know, the official pacification rate. That's been costing us about $35m to $40m a quarter as people come in and -- into the branches with judges or sheriffs and take their deposits out. It's one of the big issues on the IMF and treasury agenda to discuss with the government, certainly on the agenda of all the banks to discuss with the government. It's something that we are watching very carefully to see how the government begins to address this issue as they come back into session in February.

Okay. Two other just quick ones.

One, can you just talk to us about the securitizations on the credit card receivables? I think last quarter, you had had a catch-up on the reserves but you offset it by securitizations around $206m. Was it -- and then you had some language in the release, was it about the same this quarter? That's the first question.

Then the second is, I was surprised on the consumer finance that you were saying single digits, just given that the -- it looked like the 90-day past dues had actually improved. So, can you just give us some color on both those?

Yeah. On the first one, the FAS 140 gains would be down fourth quarter from what they were third quarter. And those will continue into first and second quarter. They will come down each quarter. So it gets smaller and smaller each quarter as this rolls in. And for at least portions of that, you know, we are using some of that to help continue to build the consumer loan loss reserves.

I'm sorry, what was the other part of your question?

Just on the consumer finance. You guys are targeting that as one of the slower growers for '03, yet I think this is right, if you look in the 90-day past dues it was actually starting to show some improvement. So is your main concern just related to Japan or just overall you think there's going to be slower receivables growth in the US?

Well, yeah, there's two things. In Japan, you know, unfortunately, even when things don't go delinquent, with bankruptcies, they are going right from performing into loss rates.

Right.

So what's happening with some of the bankruptcies both in Japan as well as to some degree in the US is that delinquencies aren't doing a good job of predicting the loss rate and we think bankruptcies in Japan are, even though they are at record levels, I expect them to be at even higher record levels next year.

Okay. And domestically?

I think domestically, what we see going forward is continued loss rates. We have seen -- the 90-days had been moving up for a long period of time. And it's just a slower process to go from delinquency into write-offs.

Right.

I think what that does do is it bodes well as you look out -- if that pattern continues of delinquencies coming down in consumer finance, I think that bodes well as we look further out into next year.

Okay. Thank you very much.

Thank you.

Thank you. Michael Corasaniti from Keefe, Bruyette & Woods, you may ask your question.

Thanks, hi, Todd.

Hi, Michael.

Really quickly I just want to get back on this page 20 thing that you explained. I understand why you take out $0.25 in the fourth quarter related to legal charges. I just wanted to get your philosophy behind taking out the provision credit issue from operating as well and why we shouldn't think about that, you know, as credit cost is operating.

Well, I was trying to be as fair as possible in terms of -- given the right -- giving the right base to work from. I think the fact that we go into the year with a very strong reserve position, you know, means that I think you can take that into account. I wouldn't say that there is any great logic around it, Michael. Just our view is you certainly have to take out discontinued operation and then -- Oh, Sandy came back in. But we feel like it's fair if you want to add back in the 29.

Okay. All right. Thanks.

Thank you.

Thank you. Brock Vandervliet from Lehman Brothers you may ask your question.

Hi, thank you very much. Actually, this is Monique on behalf of Brock.

Who is this?

Monique. A couple of questions. Follow-on question in card expenses, they have been pretty flat. When might we expect an uptick perhaps for marketing expenses or is it in the numbers offset by other costs saved?

Largely flat?

Expenses.

Could you speak up, please?

Hello?

Could you speak up, please?

Yes. In the cards business the expense line has been pretty flat the last couple of quarters. When might we see perhaps an uptick for marketing expenses or is it actually baked into the numbers?

I think we have been spending the money on marketing and if you look at the top line revenue growth in the card business over the last four years it's grown double-digit every year both top line and bottom line and that happens because of the marketing expenses but we have very good management. It's a very efficiently run business. And I wouldn't think that we would want to increase the expenses when we didn't have to. And we are looking at, for example, profit growth for the year 2002 of 22% on topline revenue growth of, what, 13%?

Okay. Thank you. In transaction services, the trends this quarter moved a little bit differently than we expected. Revenues were actually not as strong as we expected and expenses were up a little.

I think that the answer in transactions services why the growth in revenue was a little bit slower is that we are getting in new business. We think it will grow double-digit. The markets were down in this past year so that the assets that we were working with was less. And our -- the deposits that we have in that business is earning much less because interest rates are way, way down.

Okay. And a follow-on question on the regional view? In the corporate results, the results are a little bit lumpy from region to region. Can you talk a little bit about some of the larger swings, perhaps Western Europe and Japan?

Yeah. I think Western Europe had very US-like issues, if you will, which is high credit costs and, you know, really volumes that fell off a cliff. So that was what was happening in Europe vs. Japan, where you have some special situations going on Japan. We don't have the same type of corporate credit exposure. That's something we managed down significantly several years ago. So it's more transactional business there and there is a lot of activity going on with the restructurings in Japan and, you know, some of the elimination of cross shareholdings and so the activity level in Japan is a bit higher.

Great. Thank you very much.

Thank you.

Our final question today comes from Steven Wharton of Loomis Sales.

Good afternoon.

Hi, Steven.

Hi. You -- in 2002 it looks like you had on a reported basis about $233m in losses in the private equity portfolio versus about $224m in gains the prior year.

That's correct.

Do we expect to see that return to zero or even go positive in '03? Is that part of the guidance?

Where's the market going to go?

If it's flat, what would be the outcome?

I think if the market is flat overall, we should do substantially better in private equity this year than we did last year.

Okay. Then Todd, just a follow-up one more time on securitization gains in the card business, did you give the dollar amount for the gains?

No. We did not.

Okay. Thank you.

Thank you. Happy New Year.

You, too.

Thanks, everyone for joining us today. If you have any follow-up questions, we will be happy to answer them offline. Bye bye.