花旗銀行 (C) 2003 Q1 法說會逐字稿

Good morning Ladies And Gentlemen and welcome to Citicorp's first quarter 2003 earnings review.

Featuring Citicorp's Chairman and CEO, Sandy Weill and Chief Financial Officer, Todd Thomson.

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

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

Ms. Ptashek, you may begin.

Good morning everyone and welcome to Citigroup's first quarter earnings call.

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

We have with us today, Sandy Weill, Chairman and CEO, who will begin the call with some remarks, and then our CFO, Todd Thomson will take us through the presentation.

And then we'll be happy to take your questions.

So with that, let me turn the call over to Sandy.

Sheri, thank you very much and I would just like to say that we feel absolutely great about what we were able to produce in the first quarter of this year both from the point of view of our revenues and our profits, and I think it just really proves that our company in April of 2003, is probably in the strongest competitive position than it has been at any time in it's history with a management team that really has the ability to lead this company through all kinds of issues.

Over the last 20 months, really, since the terrible attack on September 11th, we have been bombarded with a whole host of different issues, including, a lot of turmoil in the world, problems in Iraq, back a year or so ago, I'm sorry, problems in Argentina, and then leading to war in Iraq where it looks like we've done an incredibly good job.

We've seen a host of corporate bankruptcies and frauds, the likes of which we've never seen in large companies like Enron, WorldCom, Adelphia, and to some extent, Tyco.

This has been the third year of market decline which has affected our private equity portfolios.

Finally, we have been working with the regulators over the last, nearly a year to resolve the problems that we've had and the industry has had with the regulated as it related to IPO, allocations as well as research and investment banking relationships as well as Enron.

It looks like that process is finally coming to an end and hopefully a resolution will be reached with all of the regulators in the next few weeks and we can continue to move on with a lot of the changes that we've instituted in corporate governance.

But, anyway, I think that as we look at our first quarter, we have record earnings from continuing operations, which is a gap number of $4.1 b, up 18% from a little less than $3.5 b a year ago.

Our earnings per share was up 20% in the quarter to $.79 from $.66.

Our total equity, including trust preferred was $94 b and we had a return in our equity of 19.3% below our target of 20%.

But very good for the kind of environment that we have been living through.

I was glad to see that in the recent issue of the Fortune 500, we were number one in terms of earnings of any company in the Fortune 500.

And also, number one in terms of equity, and a lot more than, you go through the list and many of our competitors.

We also bought a little over 34 million shares in the first quarter or about $1.2 b worth of stock, and we have $4 b remaining in our stock buyback.

We saw strength across the majority of our businesses with 2/3s of our businesses up double-digits in the quarter.

Our consumer business was up 26% with revenue growth of 11%.

We think the consumer is really in very good shape and our business is not running out of steam at all and if one looks at our position in consumer finance retail banking in cards, we would expect the rest of the year to be very good.

Our Global Corporate Investment bank had profits up 22% in the quarter, investment management was up 10%, and the only down point of any consequence was our private client business which suffered from the slowdown in the markets and really, the individual investor, not being very active.

And that business was down 28%, although our returns still were good.

As far as corporate governance and what we've done in understanding the issues with the regulators and moving on those issues from the point of view of setting up our governance committee of our Board to expensing options to a whole host of different issues.

Institutional shareholders services, at the end of March, rated us better than 97% of all the companies in the Fortune 500 for corporate governance and we're right at the top as far as companies in the financial services business.

So we feel that we have been responsive in our positioning our self for a leadership position in the future.

Again, I think that having revenues up 4% in the period that included real uncertainties leading up to and through the Iraq war as far as consumer expenditures and our company's really moving forward on it with Capital spending to have that kind of revenue increase in this environment I think was very good.

Our expenses in the quarter were up 5%, but part of that was driven by higher severance costs of $120 m, option expenses and pension expenses increased of an additional $50 m, and deferred acquisition costs expenses of something close to $40 m.

So if you put them all together over $200 m or $210 m, of our increase was due to those 3 issues.

Mexico continued to do very well in the quarter, where our profits were up 21% to just under $350 m and that was really driven by a very strong deposit growth and then better credit results.

Our different channels did a very good job in continuing to sell broad bases of products.

PFS sold $1.2 b of debt consolidation products underwritten by CitiFinancial in the first quarter.

Over $700 m of mutual fund volumes, more than 2/3's of which were proprietary, and our Citibank North America operation sold over $700 m of mutual funds and nearly $400 m of, in annuities.

Our Global Corporate Investment bank really had good continuing, good performance in its market share and ranked in this quarter, number one, in Global debt and equity underwriting, number one in disclosed fees, and number one in municipal finance.

We had a record quarter in fixed income and a tough quarter in equities and investment banking, reflecting the difficult environment.

Our Global transaction services business that was building a new coverage model and has won significant new mandates, including Ford, the Department of Veterans Affairs in Corning, and income in that area nearly doubled to $200 m with increased deposits of 14% rising to $92 b with over $5 t of assets under custody.

Our Global Investment Management, I think did a very good job in a difficult environment with weak or relatively weak markets and had earnings, a private bank had earnings in the quarter of $125 m, which is up over 50% from where they were 3 years ago and continues to gain on being a leader in that business, while our Asset Management business had 6% income growth in a very very difficult period of time.

Our credit, as one can see, improved in the quarter with credit losses in the corporate part of the business declining from last year's level, which was raised by our problems in Argentina, and also our cash base of loans were flat to where they were at the end of the fourth quarter.

Also, consumer credit was very stable in the quarter.

I think we were down 2% on a global basis, but basically, with 90 day delinquencies unchained from the 4th quarter, which is an indicator of what the future might look like.

And at the end of the quarter, we ended up with $11.6 b of total reserves, which we think puts us in a very well reserved position.

On a global basis, Citigroup International was up 71% to $1.2 b, or 30% of our earnings, and if you add Mexico to that, our earnings outside the United States is a little bit over 37%.

And finally, over the past 5 years, our annual growth has been over 10% in revenues, over 15% in net income, over 16% in earnings per share through a difficult 5 year period and through the 5 years of, after the merger of Travelers and Citicorp.

And we were the number one performer in the Dow Jones averages for the past 10 years ending in 2002.

So we think that this year is off to a good start and we pray that we do as well in the peace as we've done in the war.

And that we get this world back to a place where it can work together and we begin to see world trade begin to increase and confidence come back to the consumer.

And with that, I'll turn it over to Todd, who, I hope you saw on the television this morning.

He was very, very good.

Thanks, Sandy.

All right.

You should have a presentation in front of you or up on the Web.

We're going to walk through that quickly and get to the Q&A session.

Let me just start with page two, the highlights.

I think an exceptionally strong start to 2003, given the uncertain environment.

Record revenues, record income, $4.1 b, EPS up 20%, the consumer again a star here, up 26%.

But record GCIB income as well, $1.4 b.

That was up 22%.

And I'll talk a little bit more about each of those in a little bit more detail later on.

And I think importantly for the GCIB continuing to maintain their number one rank in underwriting and debt and equity, as well as disclosed fees.

The Golden State Bank integration is fully on track.

I'll talk a little bit more about that, and return on equity of 19.3% in the quarter.

So despite what is obviously a very difficult revenue environment for a number of our customers around the globe, continue to have good revenue growth and very strong earnings growth.

The next page shows the income statement.

Revenues up 4%, again, the $18.5 b on a held basis is a record number for us.

Operating expenses were up 5%.

Sandy mentioned some of the details around that.

I'll talk about that a little bit later as well.

A good improvement in credit costs, as you can see, beginning to feel more comfortable from what we see on the corporate credit side and the consumer credit seems to be hanging in there.

Tax is essentially flat, so income from continuing ops up 18%.

Let me go to the next page, which is the segments.

Again, actually strength across the board in the company, with a couple of exceptions.

We had double-digit income growth in six of our nine businesses.

You can see the consumer segment, again, $2.1 b, up 26%.

GCIB, I mentioned, $1.4 b, up 22%.

And then private client services, obviously a difficult quarter, down 28%.

And I'll talk a little bit more about that later on.

Investment management up 10%.

Proprietary investment activities, really a quiet quarter, not much, a few ups and downs, but not much happening there.

And then in corporate other, we have continued low interest rate environment.

We have begun terming our debt a little bit, and we had some additional expenses there during the quarter.

You can see that below the continuing ops line, there's really no changes between continuing ops and net income for Citigroup this quarter.

Last year, we had $345 m in operating earnings from Traveler's Property Casualty, as well as $1.060b gain from the IPO of TAP.

And so that's the discontinued operations $1.406 b number that you see there.

So on a net-net income basis, we're down 15% from last year with those one-time differences.

Let me move into the segments, start with the global consumer segment.

Again, that's made up of our cards business globally, our consumer finance business globally, and then retail banking.

Cards, very strong performance overall, up 27%.

North America up 14%.

So good movement there.

And sales were up 5%.

Receivables were also up fairly strongly in that business, up 7%.

Internationally, last year at this time, we had some write-offs in Argentina.

So you saw a very strong year on year comparisons in the international business.

The credit in the cards business is down about 30 basis points on a global basis from a year ago up about 26 basis points from fourth quarter.

And so it continues to hang in there pretty well.

And well talk a little bit more about overall consumer credit later on in the package.

In consumer finance, you can see that, oh, one other thing on cards.

We did, you saw expenses are up 9% there.

We have put some more money to marketing cards both in the U.S. and internationally.

And we've also begun to have some expenses as we prepare for taking the Home Depot portfolio on our books.

That'll be about $7 b in receivables that will come on in August.

Consumer Finance is a story where this solid performance in North America, the story there is, it's international in Japan.

We continue to see a soft performance in Japan with credit losses moving up.

We've taken some steps there to take costs out of the business.

And Japan's obviously is facing a very tough situation.

You've got record unemployment in Japan.

It's 5 ½% now.

It's expected to go up to 6%.

We've had record bankruptcies last year, up 34% and up an additional 23% in the first quarter of this year.

And so that's caused our loss rates to increase in the consumer finance business there.

So we taking costs out.

We're tightening the underwriting standards.

We've collapsed what were previously three legal entities into one.

We're centralizing services and collections, and reducing the manned branches there, increasing some of the automatic lending machines in the area.

And so I think you'll see costs begin to come out of that business as you look out to the next few quarters.

Retail banking, very strong performance across the board.

Obviously, we have Golden State in there, which has gone very well.

The mortgage business is performing quite strongly as well.

Mortgage originations were up to over $21 b during the quarter.

The servicing portfolio is now up to $155 b.

So that business is performing extremely well in this environment.

In addition, deposits are doing well.

And I think the branch sales process that we've instituted now in the Citi Corp. branches and what were previously EAB branches, and now in the Golden State branches will continue to drive good revenue growth in retail banking as well.

Let me talk for a minute on the next slide, on the Golden State Bank integration.

We did, during the quarter complete the branch system branding and customer conversions.

So we converted 2 million accounts.

We've integrated 350 branches.

We've closed, eliminated 33 of them. 17 were Cal Fed, 16 were original Citibank branches.

And all of that's happened with, I think, very minimal customer disruptions.

So that's given us $25 b additional deposits, 2 million additional customers in those branches.

That's all gone very smoothly.

We've already begun the process of selling the full range of Citigroup products through those branches and changed the incentive plans to encourage the right type of sales process with the customers.

And then with the mortgage business there, we've merged the mortgage businesses and will complete the conversion of the system and the servicing by the end of second quarter.

So all of that is going quite well.

Golden State was accretive to our earnings per share in the fourth quarter and accretive again this quarter.

So we feel quite good about how this is going operationally, quite good for what it adds to us strategically in California, in the ability to reach a lot more customers, and quite good about how it's delivering for us financially.

I'm going to go to the corporate investment bank segment.

Again, a record earnings for this segment.

And now let me talk about the capital markets and banking side, up 10%.

A little over $1.2 b.

And the market, obviously, is what's driving a lot of the revenues there.

Fixed income rates remain low, but they were volatile.

Credit spreads were tightening somewhat during the quarter.

So fixed income in underwriting was quite strong.

Trading was extremely strong.

For example, there were over $50 b in net inflows to bond funds during the quarter.

So you saw those results come through in our debt underwriting as well as our fixed income trading during the quarter.

The flip side of fixed income was the equity market.

Markets are down 25% in the past 12 months.

Equity issuance is actually down 50% from a year ago.

Trading volumes are down 10% on the New York Stock Exchange and NASDAQ.

Commissions fees are also lower.

So that cocktail is not a very good mix for the equity business.

And you can see that also reflected in our equity revenues and equity trading revenues.

M&A is down 19%, uncompleted M&A off a low base from a year ago.

So, again, that, you could also see reflected in our revenues.

But overall, to be able to deliver record earnings for this business, given the environment, I think it's terrific.

Obviously, credit costs improved substantially from a year ago and from last quarter in the business.

Transaction services continues to have terrific performance.

You saw revenues up 7, expenses down 4%.

So continuing to manage the expense base down there aggressively.

Liability balances have grown nicely, up 14% to $92b.

And the assets under custody remain flat.

So, again, we've had very good positive flows in the assets under custody, which has overcome the reduction in values during the past 12 months.

In terms of capital markets ranking to the next page, we remain number one underwriter in global debt and equity, increasing our shares slightly to 10.8% from 10.4%.

And continue the number one ranking in global long term debt.

Global equity was, the market volumes were down substantially.

We fell off a bit, but the basis is so small that's hard to get too flustered about that one way or the other.

Remain number one in disclosed fees.

Completed M&A improves slightly, again, off what is a very small base.

And in announced M&A, frankly, there were only two deals that were 50% of the total value in the quarter.

So, again, it's hard to get too flustered about what's going on with the rankings there.

We'll have to see what happens when volumes pick up.

But feel very good about our platform here.

Private clients services, the next page.

Pretty straight forward story.

Equity markets are down 25% in the past 12 months.

And trading volumes are down 10%.

So, as you might imagine, that directly impacts the revenue of this business.

Revenue was down 12%.

Continuing to manage the expenses aggressively.

Expense is also down 8%.

We had what I believe will be industry leading margins once again for the business.

So pretext margins of 19%.

And continue have positive net flows of $5 b this quarter.

Our bank deposit program is going very well, up to $42 b now.

But I would expect that as long as we have equity markets where they are and trading volumes where they are, that we will continue to see this type of income performance for the business.

The investment management segment is the next page.

Life insurance had decent revenue growth, up 11%.

Expenses up a lot, primarily due to the DAC impact.

We did receive a favorable IRS ruling on the dividends received deduction.

And so we're able to release $39 m in tax.

And unlike a lot of the industry, our business actually got an upgrade from Fitch during the quarter to AA plus.

So continuing, I think, to be very careful about their underwriting standards and running the business extremely well, with tight expense controls in what continues to be a difficult time for investment business.

The private banks, we mentioned another record quarter for them.

Pretty straight forward.

They continued to work very closely with some of the largest wealth families in the world, and have captured a continued share of their business as we've been able to prove that Citigroup can serve their needs better than anybody else.

Client business volume is actually up 4%.

And, again, in the marketplace where the equity markets are down 25%, that's a heck of a performance.

Asset Management, similar story to the private client business where again, you've got equity markets down 25%.

So revenues here were down 15%, aggressively trying to manage expenses as well.

So expenses were down 20%.

Income actually up for the quarter.

In terms of the regions, as you can see, Europe was a real star for us both on the consumer and corporate side.

On the corporate side it's the same story as the corporate investment bank, where you saw a very strong fixed income close both underwriting and trading as well as a good credit performance.

And consumer continues to perform very strongly.

Especially our business out of Germany.

Mexico consumer was up strong.

Better deposit spreads there and better credit.

Asia consumer business extremely strong performance.

Up 22%.

Almost $200 m in the quarter, offsetting a little tougher corporate performance.

The Japan story is really the consumer finance story.

And in Latin America last year through the Argentina write offs, we had a negative $213 m in the quarter.

And this year we made $200 m.

Revenue expense on the next page.

Again record revenues, up 4%.

Very strong performance in six out of the nine businesses.

And the ones that didn't have a strong performance were really capital markets and equity markets related.

So private client was down 12%, the asset management business down 15%, and corporate, capital markets and banking down a little bit, down 5%.

But other than that, we had strong revenue growth in the other six businesses.

On the expense side, we have been investing for growth in some of the businesses.

I talked a little bit about the marketing in the cards business and the initial expense we've taken on to get ready for the Home Depot portfolio.

In addition we took severance costs, and then as we talked about last quarter, we were increasing the pension expense for the year and for the first time chagrining options expense through the P&L.

So those two together cost us another $50m in expense.

We spent a minute on credit.

On the next page, consumer credit first, as you can see overall for the global consumer business, credit remained essentially flat.

NCLs as a percentage of average loans were flat to last quarter, down substantially from, or fairly significantly from last year, and delinquencies, as well, remaining about flat and down from last year.

So the consumer seems to be hanging in there pretty well so far.

On the corporate side you can see that we have the low-ups, write-offs this quarter that we've had for the past four or five, that's still not a particularly low number, so we're still provisioning fairly strongly in the business, but much better than what we've seen in the last few quarters.

And as a sort of a forward-looking measure, cash basis loans increased slightly, about $26m.

So not a big number, essentially flat.

You can see as a percentage of end-of-period loans, it actually went up a few basis points and that's because the loan book is down from where it was last quarter, as we've managed that loan book down about a bit.

The actually cash basis loans are essentially flat.

We feel pretty good about a number of the things that have happened in the merchant energy industry to, as a number of companies started working through their problems that quarter, we expect to see that continue, and we don't see any other industries headed into the same trouble that we've now been through with tech, with telecom and with merchant energy.

On capital, $94b in total equity, including our trust preferred.

We had a return on our common of 19.3%.

Last year it was 24% on a net income basis, so obviously that includes the TAP IPO gain in there as well.

We continue to have very strong capital ratios with our tier one at eight, seven and total capital at 11.6 and that's despite spinning off TAP and acquiring GSB (ph) in the last year.

GAAP assets about a trillion one, and during the quarter we did continue our repurchasing program, bought back $1.2b worth of shares.

So that's the story for the quarter.

Again, we talked about in the fourth quarter, going into 2003, we felt we were in the best competitive position we've ever been in.

We feel very good about that right now as we look at a world that's on the one hand, has a lot of difficulties, but on the other hand, and a lot of challenges, but on the other hand could for us provide a lot of opportunity.

So with that, why don't we turn it over questions?

Thank you sir.

At this time, anyone wishing to ask a question, please press star-one on your touch-tone phone.

All questions will be taken in the order they're received and you'll be announced by name when we're ready for your question.

Once again, anyone wishing to ask a question, please press star-one.

One moment please.

Thank you.

Our first question comes from Henry McVey and sir, please state your company name.

Good morning.

It's Henry McVey with Morgan Stanley.

Morning Henry.

Just a couple quick questions.

One was on cards.

Can you just give us more of an outlook, I mean, you had margin contraction, it looked like the provisioning was down a little bit, but the trends were still up, in terms of delinquencies as well as charge-offs, and then you got Home Depot going, coming forward.

How should we think about that business?

You were seeming to indicate that the consumer was doing OK, but if you pull out Golden State, at least in the card division it looks like the trends are still up.

We think, you know, the card business is in very good shape and we would expect to see very strong performance throughout the rest of this year.

Yes, I think credit seems like it's hanging in there pretty well.

We've got decent receivables growth there Henry, so obviously that's driving future income growth and we'll see another seven billion come on with Home Depot.

So that should be helpful as well.

I think what you saw in the quarter obviously was sales are up 5%, but I think relatively soft for the industry, especially in the U.S. we had weather issues and obviously you had the uncertainty around Iraq, so you can read all the news about what's going on with retail, which has some impact on sales.

And so I think that was, sales were a bit weaker than they might otherwise have been.

OK, and just on consumer finance, you were indicating that expenses were coming down, but it looked like to me if you look at expenses were actually up 15% on 9% revenue increases and that was in, that was actually even outside the U.S., operating expenses were up 24% on 11% of revenue increase.

So are you guiding forward that operating expenses are coming down?

Yes, I think going forward, we expect to see expense going down.

What you're seeing right now is the cost of beginning to consolidate the things I talked about in Japan especially, and severance costs in Japan.

OK, and just one final question.

On the, if you look that regional breakdown, if you look at Latin America Corporate, you had a huge surge there, and then the U.S. investment management business was actually up pretty substantially on a sequential basis, yet the asset management earnings for the, for your, you know, overall asset management section were flat.

So I'm just trying to understand the trend lines on Latin America Corporate and then investment management in the U.S.

Yes, Latin American corporate, couple things going on, obviously we've got the absence of the write downs in Argentina from a year ago, and that's a substantial amount of that, also we've got probably a little bit better comparison in Brazil performance versus what we saw a year ago as well.

So that's really the corporate story.

On the investment management story, that's a very similar situation where in last year we had some write downs on the retirement services business, which is in part of our asset management segment in Argentina.

And so those are more sustainable run rates you think?

The 200 for this quarter or the investment management number?

The 200 on the Latin America.

Yes, I think that's pretty sustainable number.

I mean that's much lower than what we saw going back a year-and-a-half, two years ago, it was a much stronger region for us then.

So I think as long Brazil continues to do the kinds of things they've been doing, and we've been very pleased with what the president there has been doing, and as long as Argentina starts to come out a little bit of where they are, we should be able to see that and hopefully better going forward.

You have an important election in Argentine on the 27th, and then, you know, our runoff in May and depending upon the winner of that and their desire to get back into the world community, it could be a big change, but you never know until the elections take place.

OK, and just back on the cards, what I want to leave with you think that at the end of last quarter, you guys said that you thought that things were stabilizing in terms of delinquencies and charge-offs, and so this first quarter run rate, you guys are comfortable that that's going to be the flat line for the rest of the year.

No, I think what we said was we thought, I thought that the consumer credit costs would be about flat or flattish for 2003, in what we saw in 2002.

And so what you saw in 2002 was improvement sort of quarter by quarter and beginning to flatten out.

Right.

But I think you'll see something here where maybe they're moving up slightly during the year.

I would expect to see that happen a little bit, but nothing too dramatic that I can see at this point.

OK, thank you guys.

Thanks Henry.

Thank you.

Our next question comes from Glenn Schorr and please state your company name.

Thanks.

UBS.

Hello.

Hi Glenn.

Hi there.

Good to hear you got that UBS out.

Stuttered a little bit.

Couple of quick ones.

One, if you could just address any movement or change in your thoughts on the potential re-dollarization of Argentine deposits?

Yes, I mean that's an ongoing interesting saga, and you know, they haven't written the final chapter on it yet.

So we have to keep an eye on it and see what happens.

The latest, as you probably know is that there was a ruling on re-dollarization that had to do with one specific case, and…

The government had a decree about a week ago allowing people to exchange dollars, exchange their pesos at a different rate and the government would make up the difference in their bond issuance, and I think that we think if that is very well received and acted upon by the people, it will reduce substantially any potential further problem in the deposits.

And that's, that was off to a pretty good start.

So I think that's the only real change that's taken place.

So it's basically still in the government's hands, whether or not they're going to potentially foot part of the bill.

Well they've offered to.

And they are.

They've made the offering to actually foot the difference, the entire difference, and so that, it's a voluntary program as long as we take them up on it, then that will be a very good thing.

And part of that bill, which changed as it progressed was that they were going to do the same thing to the banking system and give them a piece of paper to reimburse the banking system for the monies that they lost in the Imparos (ph) and in the original non-balanced exchange rate of dollars to pesos.

And that was left for the next Congress to work on and there is still a possibility that something might happen and that we can get some of that money back.

OK, that's an actually a positive change in the last couple weeks.

That is correct.

On GSB, Todd, I might be fishing here, but you get a lot of good metrics, is there any chance we could get the revenue and expense or revenue or income contribution to retail in the quarter?

From Golden State?

Yes.

No we haven't, we haven't broken that out and what happens is we very quickly integrate these businesses into our existing businesses, so you know, you're not going to be able to tell what's Golden State and what's the rest of our mortgage business.

Understood.

Understood.

How about on the funding side?

You alluded to this in your prepared remarks, but you have about, I don't know, call it $60b of debt coming due in the next two years, which is basically half your debt.

Just what's the thoughts in terms of how you're playing the curve, if you will, and how quickly you'll start to finance that given how low rates are.

Well I think as you saw, especially in about a month ago, in the first quarter, it looked like a pretty good time to go a little bit longer and so we termed things out a little bit then at that point.

And I think, you know, we're going to keep an eye on it, and try to make judgments about when we think rates are headed faster than what the curve is saying, and we, you know, we can move pretty quickly on those things.

OK, and then just finishing off the rate side, I think Henry alluded to this, the net interest margin in cards came down 33 basis points.

It was up a little bit in consumer finance, but it, do you, are you a net-net beneficiary if there's another rate cut on the card, net interest margin side?

In the cards business, yes.

And then overall?

Overall we would still benefit as a company if the rates were brought down another 50 basis points.

Got you.

Last thing, flipping through the K last night, the loss ratio you're assuming on credit card securitizations is about 5.6% so we're a little bit beyond that right now.

Does, do you plan on bumping that up going forward or are you feeling there might be a little bit moderation in the loss ratio?

No I think it's within the band that we expect at this point.

OK, cool.

Thanks very much.

Thanks Glenn.

Good luck.

All right.

Thank you.

Our next question comes from Ken Worthington and please state your company.

Hi good morning.

CIBC.

Quarter losses in the corporate investment bank fell off in the first quarter.

The outlook in the 10-K was for 2003 credit losses to be comparable to 2002, Todd, I know you said you were feeling a little bit better about merchant energy and some other sectors, but has the outlook changed, or do you still expect GCIB credit losses to remain at the 2002 level?

Yes, I think it's beginning to look a little bit better now than we might have been worried about as we get to the fourth quarter.

So merchant energy names have improved.

You've seen some specific restructurings have gone on that's positive.

Brazil looks like it's trending a bit better, and so at this point, I feel a bit better about corporate credit.

Great.

Thank you.

Yes.

Thank you.

Our next question comes from Richard Strauss and please state your company.

Deutsche.

Hey Todd.

Hey Sandy.

Hi Richard.

How are you doing?

Good.

Couple questions here.

On fixed income, you know, maybe you could just give us a sense as to how balanced the results were in terms of just the mortgage area, high yield, obviously that's had a resurgence, corporate W's.

If you could just given us some color here?

Well I think the specific stars would have been high yield and mortgages for the quarter.

Investment grade was also pretty strong, but you know, in terms of year-on-year, quarter-on-quarter comparisons, high-yield and mortgages, really the two stars.

And what about the cash versus derivatives, but maybe you could also just give us a sense in terms of the outlook, obviously, near record or record results here, what should what you thinking actually and what do you want us to be thinking at this point?

Well I think in terms of that business, it really depends on what happens with the markets and revenues and if we were to see things begin to strengthen a little bit, then I would expect we'll start to see some more M&A activity and start to see some more equity activity.

And if things got worse, than rates may come down further and you might see some further fixed income activity, but, you know, at this point it's really hard to tell which of those two things are going to happen.

So far in the quarter though, I mean things are pretty, things have been pretty stable though.

Yes.

OK, in terms of your private client business, I think this has been, you know, say you pointed out, the one that has been one of the weaker areas.

You've got about I guess 12,500 brokers, this number has only come down a bit, obviously some of your competitors have had much more, some big reductions to their brokerage sales force.

I mean you obviously have new management there with Sally.

What is she thinking in terms of what is the proper size of the sales force and just in terms of the pace of expense reductions here?

Well, I think we actually feel pretty good about that size.

We look, and she has been, and Tom Matthews, who runs that broker network, look very close at the contribution per FC.

And so they look at each individual FC and make sure that they're contributing.

And with our network, which I guess apparently would be different than the way some of the other ones were operating in the last couple of years, almost all those brokers were continuing net profit to Citigroup, and so we feel pretty good about that.

But a big part of the reduction in the broker force has been people that have come onto the sales force in the last three or four years from training programs and that have not been able to really do that well in this marketplace.

And I think that's been more than two-thirds of the people that have left over the past year.

OK, and then.

Rich, and I would say in general that our focus at Citigroup, as you know, is on distribution systems.

We think that's pretty important.

And so we want to support that distribution system, and as long as each of those brokers is generating net revenue for us, our real cost focuses are more on the other parts of the business.

How do you take the rest of the business, the non-broker part, and take cost out of that.

And that's what we've had a lot of focus on in the past...

Right.

Well, I guess one of your other big distributors would be PFS.

And I'm just curious, I mean the contribution to the retail -- I mean, the financial needs analysis and everything, it looks like that's been pretty stagnant for a while.

And I just want to know if there's any projects underway to really get this to be a better contributor.

You're looking at a point in time with not a lot of retail interest in the equity markets.

We've seen money coming out of equity mutual funds, and moving into fixed income.

So I think it's not surprising that the amount of mutual fund sales that we've done at PFS and at Citibank, as well as Salomon Smith Barney, is down.

It's down everywhere.

However, what PFS has done in doing 1.2 billion of mortgages and debt consolidation is an incredible number for something that started about six or seven years ago, running at a rate of close to $5b.

So we should keep it at this level, you feel.

The mortgage area of PFS?

I think that as long as rates stay down, the mortgage business is going to be very good.

And I think we said that we had a backlog coming out of the first quarter that was equivalent of the amount of business that we did in the first quarter, or a little bit over $20b in mortgages to be processed.

Great.

OK.

Well, thank you.

Thanks, Richard.

Thank you.

Our next question comes from Mike Mayo.

Please state your company.

Hi, Prudential Securities.

Can you talk a little bit about the competitive environment for the consumer in North America?

I see that the margin is down both for credit cards and consumer finance.

Linked quarter, that is.

Yes, I think what you're seeing a little bit is the catch-up on the cost of funds size for the reduction in rates that happens when interest rates are coming down.

So you've seen that sort of flatten out a bit.

So I think that's part of what's happening, Mike.

But if your answer is, is it competitive, I think it is competitive.

The credit card market has been so competitive for so long that there are very few players left other than the real big players so that's--I think in the end plays to our advantage.

I think you've seen some of the same things happen in the consumer finance business.

So we expect it to...

And then...

... continue to be competitive.

The advantage we see that we have is we have funding costs that are as low or lower than anybody else and we have operating costs that we keep as low or lower than anybody else.

And so on a competitive basis, we try to be as tough to compete against as we can be.

And then separately, the Wal-Mart lawsuit against Visa, how do you see that playing out?

But more specifically, if they base any settlement damages based on credit card and debit card volume, you get hurt in a big way.

If they base it on debit card volume you don't get hurt.

I'm sure you'd be in there fighting saying it wouldn't be fair if you were to get assessed based on credit card volume.

Any view...

Then you can say one other thing, that if they based it more on Visa rather than MasterCard, we would be hurt less, too, because our business is mainly with MasterCard.

Yes, this is sort of round one of a very, very long fight, I think, Mike.

It's--the trial actually starts later this month.

That'll go for awhile; it'll probably get appealed.

We aren't named in that, nor is any other bank at this point, so it's just Visa and MasterCard, although MasterCard is trying to get out of that.

So we're going to have to see what happens.

We'll have to see whether--you know, who wins that and we'll have to see whether in fact there is an ability to assess the banks or not, which is not that clear.

And then it's a question of if they do assess the banks, you know, along what basis, so I think we've got a long way to go on this one.

And in general I would say that since we've been with MasterCard and that our relative, as you pointed out, our relative volume of debit cards is relatively small, we should be in a decent position, but we'll see what happens.

And last question, 37% of your business is outside the U.S., as you said, and I got this question just the other day, but to what degree does anti-American sentiment outside the U.S. impact your operations?

Are you spending more extensive...

We haven't really seen anything of any great consequence to date on that.

You'll see--you would have seen in this latest result that our results out of Amia (ph) , which includes the Middle East and Africa, were quite strong for both businesses, and you'll see that the results in Asia for the consumer business were quite strong.

So, so far, our customers still want to do business with us as much or more than ever.

Thank you.

Thanks, Mike.

Thank you.

Our next question comes from Brock Vandervliet and state your company name, please.

Good morning.

Brock Vandervliet from Lehman.

Morning, guys.

Just wanted to circle back to your quarterly financial supplement and the reclassifications which you made principally within primarily the principal transaction line.

I noticed that moved down from 44% to 35% of total trading volume.

I know this, that ratio moves around a lot quarter to quarter;

I'm really not concerned about that.

I was just curious if you could speak to that difference versus the prior disclosure.

Yes, the only real difference there is we had--you know we've taken the private client business out; that's now a separate segment and so that--those results are netted out, as you can see, something called revenue recognized and private client segment is netted out of the numbers up above, and so that's the only re-class done in that disclosure.

OK, thank you.

And secondly, if you could just elaborate on what this severance was tied to; you may have talked about that already.

And I know you've made some comments about the PFS dynamics.

Setting that aside, within GCIB I think you've done a pretty good job in preserving operating leverage.

How much is there necessary--how much--is there more to do in terms of right-sizing with the expenses or are you pretty much set borrowing another leg down in the markets at this point?

I think basically the severance, the biggest contributor to that severance cost of 120 million was the GCIB and I think you can expect to see that still continue as we consolidate certain functions that did exist at Citibank and at Salomon Smith Barney and as they come closer together and as we evaluate how many different sales forces and how many people on these sales forces we can have that are covering the same accounts and what we can do efficiently and effectively.

We've done the first part of it in the developed world very effectively in the first quarter and we have some more work to do outside of the developed markets and that will--you'll see that possibly in the second quarter.

But we're always looking at how our business is doing and what are our expenses relative to the level of revenue and trying to make sure that the one relates to the other.

Great.

Thanks, that was helpful.

Thanks, Brock.

Thank you.

And again, anyone wishing to ask a question, please press star, 1.

One moment, sir.

And sir, at this time we're showing no further questions.

Everybody, thanks again for joining us.

If you have any further questions, feel free to give us a call and have a great afternoon.

This concludes today's conference.

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