花旗銀行 (C) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Citigroup's third quarter 2003 earnings review featuring Citigroup Chairman, 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 thanks for joining us for our third quarter 2003 earnings report. We are very happy to have with us this morning Sandy Weill, our Chairman, who will open up the call with some remarks and then he will be filed by our Chief Financial Officer, Todd Thomson, who will walk us through the presentation. With that let me turn the call over to Sandy.

Sheri, thank you very much. I just want to say at the very beginning that I have enjoyed all of these years of quarterly conference calls and meetings in person with all of you, and I think this will probably be my last call and I would just like to say that as I look at our numbers I think that they are a lot better than what the market is interpreting them at initially. I think we have a lot of things to feel very good about in Citigroup, at this point of time, not the least of which is how smoothly the succession process has gone with Chuck and Bob being really an incredible team that has been accepted by all of the senior management of the company and we have made this change really seem very, very seamless, and we have not lost a beat as we think about how our company is going to go in the future.

I think that really says a lot for the quality of the management of our company. When we look at this quarter, I think there are lots of things that one should feel good about. Our revenues were up 10 percent to $19.4 billion, and our earnings in the quarter were up 25 percent to 90 cents a share and our dollar earnings were $400 million more than the earnings that we have achieved in any quarter previously. So, we made a record by a lot, very close to $4.7 billion this quarter.

All of our businesses, I think did well. Our consumer business was up 14 percent in the quarter, and I think that we see the business and our banking segments, domestic Consumer Finance and our credit card businesses are looking really very, very good. Our corporate investment banking profitability was up 31 percent in the quarter over the same quarter a year ago, and investment management was up 17 percent. One of the numbers that I think really stands out when you look at it is the private client assets were up 17 percent in the quarter to nearly $1 trillion, and that is just about back to the peak that it achieved in the year 2000 which I think augers well for the future.

Also, for the eighth quarter in a row we were the number one company in global equity and debt underwriting in our Corporate and Investment Bank. We did a couple of things in our card business in this quarter. Number one we closed on Home Depot and that business is running very well and we think it will be a good contributor as we move into the future and get the initial expenses behind us that were important in getting that business up to snuff.

We just last week got the approval from the OCC on the Sears transaction which we would expect to close at the end of this quarter, and when one looks of that and I think we will have more to say when it does close, but credit card volumes are much higher than we were estimating at the time that we did the deal, I'm talking about all credit card volumes, and also Sears' same store sales are higher than we thought they would be.

So, we think that also will be a good contributor. Finally, we had deposit growth which included Golden State of 49 percent in the quarter and I feel good especially about the 42 billion that we have in our U.S. bank deposit program which is basically monies that have moved from money-market funds into deposit programs and it is a substantial amount. When you look at some of the statistics, our return on equity went back over 20 percent to 20.2 percent in the quarter. Our equity and trust preferreds at the end of the quarter was $102.4 billion.

So, again we continued to increase our equity but make the kinds of returns by running our business well. I think that one of the (indiscernible) improvements in the quarter was what happened to credit quality. As you see delinquencies continue to decline in the consumer business and the write-offs while painful building up reserves over the last two years, are turning the other way in the corporate book and that led to our provisions being 40 percent lower than what they were the previous year. One should remember that this quarter we raised our dividends 75 percent to 35 cents, yet that 35 cents represents just a 40 percent payout of our earnings in this quarter, and I think it represented the 17th year of dividend increases for our company.

So that is something that we think one should think about going into the future as our earnings increase and we are very mindful of being able to hopefully be able to continue to look at increasing dividends into the years ahead. There were some special items in the quarter, a little bit of noise. We did have a reserve release Of $200 million from Associates, but offsetting that we had net write-downs in Argentina and in Mexico of nearly 75 percent of that or close to 150 million, so that the net from all of that was $50 or $60 million in the quarter.

Also, we made $93 million finally in our private equity business, and when you think about that kind of profit on an amount of money that we have invested in equities, that may be something close to $10 billion. Our profitability is really -- continues to be very low relative to the amount of our capital invested in that business compared to some of our other businesses. So, all in all, I think we feel good about reaching a new level in revenues and profits.

We think that the outlook, looking into the future, continues to look very good in our consumer businesses and credit continues to improve which I think will positively affect all of our businesses going forward. With the strength in the marketplace, we would expect that there would be more activity in the capital markets, and then more M&A activity as the business environment continues to benefit from the tax cuts in the United States and some of the other changes that are taking place in other parts of the world.

So, I think from this vantage point, the future looks very good, and I think it is a good time to turn it over to younger people. And with that, I would like to turn this meeting over to my good friend Todd Thomson, who will take you through all of the numbers.

Thank you, Sandy. Fabulous results. You are clearly going out with quite a bang. I was thinking that if we are going to have these kind of results every time we have a CEO transition, we should maybe do it every quarter. But fabulous, fabulous job. We are beginning I think to see the benefits of some of the improving economies around the globe. When you combine that with the strong franchises that we have and the very strong business management, business by business that we have, that is allowing us to print I think very nice results this quarter, and I think on an ongoing basis.

In the economy just quickly, we are expecting pretty good growth third quarter, somewhere in the mid 5 percent GDP growth for the U.S. and some improvements around the rest of the world. Very helpful. The equity markets have picked up this quarter rising another 3 percent for the Dow, 2 percent for the S&P versus the end of last year and we are up over 20 percent on the year for the S&P. So again, that helps a number of our businesses. Consumers indicators continue to be strong. Unemployment rate remains pretty flat at around just over 6 percent and bankruptcies this past quarter for the first time are not much above what they were a year ago, so that is helpful as well.

Consumer confidence is hanging in there and we expect sales as we look at our Citi Cards sales in the U.S., our sales per active account are going quite strongly in the third quarter, so we expect that to flow through into sales into the economy. In terms of capital markets, trading volumes were down from last year as well as down 7 percent from the second quarter. So you would expect to see that in our trading results a bit. In terms of spreads, credit spreads narrowed a bit during the quarter not as much as we've seen previously during the year.

That has a small negative impact in the credit derivative book. Citi spreads narrowed an additional 4 basis points during the quarter, so we're down to about 60 over on our five years, which is a nice tight place to be but not as tight as we would like to be. So as that rolls into our numbers, you can see from the first page of the presentation that I'm going to walk through and then we will take some questions. The quick highlights.

There's $4.7 billion of income after-tax, up 27 percent from the prior year. That is nearly $400 million higher after-tax than our previous record which was last quarter 4.299 billion last quarter. So $400 million higher than we have ever had before. That is despite ongoing weak performance in Japan. You can see from our release that Japan was down nearly $200 million from after-tax from last year in income, some further government actions, which I will speak about, in Argentina which net cost us about $95 million after-tax, and then write-down of investment security which as Sandy mentioned, net of a recovery (indiscernible) Mexico, cost us another 40 million or so in Mexico.

So, despite those issues we overcame those and delivered I think fabulous results. EPS 90 cents, up 25 percent. Again record revenues. Expenses I will talk about a little bit later in the presentation. One of the big stories for the quarter is the provision for credit losses for both corporate consumer combined coming down 40 percent from a year ago and again I will speak to that a bit in the presentation.

We did close the Home Depot acquisition at the end of July. As you know, we've talked about some of the expenses we have as leading up to bringing on that portfolio and now we're seeing the revenue as well, so that was a positive during the quarter to our income. In addition, all of our regulatory approvals have been obtained for closing the Sears acquisition which we would now expect to do some time in early November.

ROE of over 20 percent with extremely strong capital ratios. We've built our capital a bit for the Sears transaction but strong even net of that, so very good ROE on very strong capital. Go to the next page which is the P&L for the entire place. Revenues of 19.4 billion, a record, up 10 percent. You can see credit costs there down 40 percent. So pretax income, up 26 percent and then a tax benefit in tax line there with income tax of minority interest of $200 million from the legacy Associates businesses tax rate for the quarter of 31.26 percent.

So not a particularly low tax rate. That is about where we have been running year-to-date and higher than many of our peers and we continue to focus on ways to improve that tax line. I also want to mention that we had during the quarter, we adopted FIN 46. FASB has now actually delayed the adoption of that until next quarter but we went ahead and adopted FIN 46 as it is currently written and interpreted. We said in our first quarter Q that that would result in consolidating we thought at the time about $5 billion (ph) of assets. The actual impact on us for the quarter was consolidating an additional $2.2 billion of assets with no P&L impact.

Let me spend a minute on page 4 with what happened in Argentina, just to be very clear about what the ins and outs were and where they are in our P&L. A couple of issues happened during the quarter. First is similar to what we have been facing in our bank with our depositors, customers of our annuities business have been going to the courts one by one and getting judges to overturn the pesification decree that the government had put out on their annuities.

It became very clear to us that the courts were going to continue to make these rulings and the government was doing nothing to solve the situation and so we elected to propose a voluntary settlement with our customers which most of them have now agreed to, and so we had to go ahead and make that write-down or write-off this quarter. In addition, the government had previously given us some government promissory notes and these notes were actually backed by very specific tax receipts to the government and we were allowed to use those at face value to pay our taxes in the country and so they were pretty valuable.

They have now said that they are going to take back the GPN's, the government promissory notes, and they are going to give us other bonds that are not backed by specific tax receipts and that we cannot use to pay our taxes locally. These are obviously worth less. By the way, the custodian actually considers this change illegal and has resisted it but to be conservative we're taking the write-downs this quarter.

So, as you can see, that cost us an additional $111 million in the International Insurance Manufacturing business as well as $9 million in the Asset Management business. Now, the good news was that the consumer lending portfolio down there continued to improve. The size of that portfolio has come down fairly substantially over the past year and a half or so. The quality has been very good. People continue to pay on their credit cards. That is how they can buy things in Argentina and the mortgages have performed well and the emparos (ph) in the bank have come down as a result of some settlements that we have done there.

The results of that was a release of reserves after-tax for those issues of $87 million in the consumer business. You can see on the right hand side, Global Consumer we had a net release of 87, international insurance manufacturing an after-tax cost of 131, and in Asset Management we had to write-down the (indiscernible) acquisition cost for customers which no longer have the same value as we might have assumed before as well as the GPN, so $51 million there.

Net all that out and it cost us $95 million after-tax during the quarter at the Citigroup level. So we go to the segment income on page 5. Global Consumer is over 2.5 billion, up 14 percent, continuing to roll along very nicely. Global Corporate investment bank up 31 percent. So very good performance there. Again partly driven by much better credit environment and much lower credit provisioning that what we saw a year ago. Private client services, up 8 percent and that is the first time this year they have been up over the prior year and they were up over the higher prior quarter, so beginning to see some good business momentum in the Private Client Services for the first time in a while.

(indiscernible) Management was actually up 17 percent despite those $182 million charges I talked about on the previous page for Argentina as they realized losses are down substantially from where they were a year ago. So, good performance there. Proprietary Investment Activities had a positive versus a negative last year. Remember last year we had that negative including the sale of one of our large buildings, 399 Park, but we still printed at negative a year-ago.

This year the environment has clearly gotten better. We're starting to see private equity pick up a bit and we actually had an IPO out of Citigroup venture capital this quarter that gave us a positive $80 million after-tax. And then in corporate other, a positive 136, that includes the tax release of $200 million and we are also continuing to see benefit of the low interest rate environment in our treasury business. So EPS, 90 cents versus 72 a year ago on continuing ops.

In discontinued operations you can see the $214 million from a year ago. That was the final stub income from Travelers Property Casualty that we had up through August of last year before the spinoff. And so on a net income basis, income was the same, EPS was the same and the percent change from a ago is a little bit lower. In terms of the products underneath the segments on page 6, Life Insurance and Annuities, again strong performance. The underlying business performance actually has picked up dramatically and we will talk about that in a while, but there is a very strong performance.

The income performance had a bit more to do with the lower realized losses from a year ago. Transaction Services also a very strong performance, up 57 percent mostly having to do with better credit performance than a year ago. But very strong performance across capital markets of banking, Retail Banking, private bank, cards, good performance. So double-digit growth in six of our nine businesses. Consumer Finance still facing some pressure from Japan and Asset Management would have been a positive growth this quarter except for the deferred acquisition cost write-off that we talked about for Argentina.

On a regional basis, actually very nice performance across every region with the exception of Japan. Latin America loss last year versus positive this year, again despite the $95 million we talked about in Argentina. EMEA is strong both corporate and consumer. Mexico, up 27 percent from a year ago, very strong performance. Asia hitting on very nicely, again both consumer and corporate. And then Japan really has been a struggle for us, as I mentioned, almost $200 million after-tax. Less income this quarter than third quarter last year.

That is primarily an issue with Consumer Finance. Corporate also down from a year-ago. The good news or the bright spot if there is one on Japan, is that the Consumer Finance business on a pre-tax basis did perform a bit better this quarter than last quarter and credit costs were a bit better this quarter than last quarter. So, I believe we're beginning to see the turn in that business.

On a year-to-date basis, on page 8, we are $13.1 billion of income after-tax, up 19 percent from continuing ops. On an EPS basis up 18 percent and very strong performance across just about every one of our segments with the exception of private client. Consumer up 18, corporate investment bank up 18, investment management up 14, Proprietary Investment Activities a positive versus a negative to date last year, and corporate other continue to perform well. So, on a year-to-date basis, looking across every one of our businesses, very very strong performance for the year.

Let me spend just a minute on each one of the businesses, starting on page 9. In cards, we again closed the Home Depot acquisition, $6.4 billion of assets came onto our book. We also, as we talked about last quarter, are reducing our teaser rate or val (ph) card activity and so the net increase of that was about 5 percent in managed receivables and a nice increase in our net investment margin, again we have had a much lower percentage of val cards on our book here.

Credit loss ratio decreased 46 basis points versus last quarter. So we continue to see both in delinquencies as well as losses a strong performance in the cards business in North America and in international. In Consumer Finance, average loans continue to grow overall, although they decreased internationally because of the continued liquidation of some of the loans in Japan which is partially offset by continued growth in Europe.

Net Interest Margin is down 66 basis points again driven by what is going on in Japan. However, the NCL ratio actually improved a bit versus last quarter. Again, we saw a modest improvement in our loss rate in Japan from last quarter. So, North America beginning to see some good momentum and continuing to deal with the ongoing issues in Japan. Retail Banking, deposits up 22 percent from last year. Obviously Golden State acquisition helped with that as well as the growth in legacy businesses.

Loans up as well. We had record mortgage originations this quarter of $37 billion with a pipeline of about 20 billion now. Also good growth in the German installment loan business. We had, as we mentioned in the release, a write-down of an investment security in Mexico, and the previously mentioned Argentina reserves partly went to Retail Banking as well as cards. So, record revenues and income in Retail Banking and really performing quite well across the place.

In the -- page 10, Global Corporate Investment Bank, what we saw happen here was a very good credit performance. Again provisions down almost $600 million from a year ago. And in the capital markets business, debt underwriting better than a year ago, so the debt markets, that underwriting market has continued to be strong versus where it was a year ago but down from extremely strong first and second quarters.

Equity writing really flat to a year ago and again down from a decent quarter last quarter. Advisory fees are down a bit. M&A fees are actually doing pretty well. What is down there are -- a lot of the loan fees are down in that business and therefore the advisory fees are down a bit. In trading related, as I mentioned before, the trading activity was down across the street. Fixed income trading was down a bit from last year, but substantially from very large trading volumes last quarter.

Equity has picked up from what was a very tough third and fourth quarter a year ago and down slightly from last quarter. FX, very strong quarter versus a year ago. So, Capital Markets in Banking, again stronger fixed income, higher set of (indiscernible) versus a year ago and lower credit costs versus last quarter, lower fixed income, stronger FX, lower expense and lower credit cost. The Transaction Services business, I think obviously that business is hurt by the continued low interest rate environment. But, very strong customer momentum.

As you can see liability balance is up 17 percent to over 100 billion and assets under custody increasing 8 percent to over 5.5 trillion. One thing I just want to point out on the corporate investment bank been edges went up one on the Corporate Investment Bank, is our margin during the quarter, 45 percent pre-tax margin, I believe that leads the street at this point. Our capital markets rankings, we continue to be one, two and three virtually across the board. This year-to-date with the one exception of completed M&A were one, two or three in everything.

As that translates into revenue, obviously as we maintain decent shares here in most things, we are affected by what is going on in the markets, and versus a year ago, debt underwritings are up a lot, equity writings actually up a bit and M&A (indiscernible) announced it's down. So that is what the business is working with there. In private client business on the next page, we are beginning to see some real strengthening in the retail brokerage market. Income up 8 percent, revenue per FC up to almost 500,000, and we have really been holding the financial consultant census relatively flat, it is down a bit versus a year ago, but only four percent, unlike others who I think did a lot of reductions in their salesforce there. We've got a very high-quality salesforce and we're focused on maintaining and supporting that salesforce and we think that will payoff in good business momentum in the future.

You can see client assets, nearly one trillion and fee-based assets up to almost $200 billion there. Pre-tax margin in this business, an industry leading 22 percent. In the investment management segment, Life Insurance and Annuities, obviously affected by what we talked about in Argentina. I think the real story for that business for this quarter is the very strong sales volumes that we saw during the quarter. We saw net written premium for group annuities up 72 percent, for life up 64 percent, much higher variable individual annuity sales and lower fixed. Net of that was down 6, but good variable annuity sales.

In Japan, with our new joint venture in Japan, we actually generated nearly $1 billion in net written premium in Japan. So very strong performance coming out of that business. In the private bank, what can you say? Seventh consecutive quarter of record earnings. Revenues up 23 percent and a lot of that is driven by very strong client trading activity as we continue to provide access for our wealthiest customers into the institutional quality execution of Smith Barney, Solomon Smith Barney for trading activity.

And that business strength actually was across almost every region, U.S., Asia, Latin America, Japan, all performing quite strongly during the quarter. Asset Management, year-to-date net flows of 5 billion and a lot of that is in retail. Long-term net flows and some of the reductions that have been in fixed income or liquidity flows, and so it is more of the higher-yielding assets that are coming on the books, which is a good thing. Again, ex the Argentina charges, income in that business would have been up 8 percent.

Let me spend just a minute on the operating leverage issue on page 14. We pride ourselves on having a very strong eye on expenses. You can see revenues for the quarter up 10, expenses up 14 percent. Obviously, that equation excludes credit costs which improved by 40 percent. So, as we last year really focused on not just revenue but also credit in determining what compensation we should accrue for in the corporate investment bank, we went to a comp to risk-adjusted revenue, which is revenue minus credit costs, and as credit costs have improved, the comp ratio has increased (technical difficulty) has increased, and so that was an additional $236 million of accrual this quarter versus what we did last quarter.

In addition, we have had expense challenges that we've talked about previously for the increase for acquisition costs, increased pension costs and insurance costs and stock option costs which we're expensing this year and did not expense last year. That was about $200 million split about a third, a third, a third, in each of those issues. But on the operating basis, we continue to focus very closely on expenses. I do think that in the existing environment, it is reasonable that we would begin to make some investments in some of the businesses that capitalize on future growth, but we want to do that with and eye to make sure that we are always keeping expenses at the right levels.

Let's spend a minute on credit, consumer credit first on page 15. Year-to-date bankruptcies are up about 7.5 percent but for the quarter they were up only modestly. So we are seeing some of that benefit flow-through in the net credit loss line. Credit loss is down to 314 for the consumer business overall, and delinquencies continue to improve down to 223 from 231. So, good performance there.

Obviously when the Sears' portfolio comes on, that is a pretty big portfolio, about $30 billion. That will affect the credit loss ratio and the delinquency ratio somewhat as that tends to be a high yielding portfolio but a higher average loss rate portfolio. And when that deal closes our plan would be to spend some time explaining that to our investors so that that is very clear. On the corporate side, again very strong performances.

We had a provision of 76 million this quarter versus nearly $600 million more than that last quarter. So, year-to-date on the right hand side of page 16 you can see that year-to-date provisions have come down from about $1.5 billion last year to about $500 million this year. So down about $1 billion over the first three-quarters of the year. Cash basis loans during this quarter came down over $400 million or about 10 percent.

So we are seeing the benefit of an improved credit environment flow-through into our numbers. Our classified loans also were down substantially this quarter. We expect to see that trend continue, and the corporate reserves are very strong at this point. Again, we expect to see an ongoing continued good corporate credit environment for the next few quarters here. Finally, in terms of capital discipline, we bought back 5.7 million shares during the quarter for $264 million.

That brings us to 48.9 million shares repurchased year-to-date. With that, our tier one ratio and total capital ratios are extremely strong, up to 9.5 percent tier one and 12.6 percent in total capital. Total stockholders' equity including our trust preferreds are up over $100 billion (ph), 102.1, and that includes as I said the trust preferreds we have. GAAP assets of 1 trillion 200 billion, again including the 2.2 billion that we consolidated from FIN 46. Turn equity on that very strong capital base of 20.2 percent. That is it for the presentation. Why don't we turn to some questions.

+++ q-and-a.

At this time we're ready to begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Guy Moszkowski.

Good morning. I'm with Merrill Lynch. Question for you on the, first of all on the retail North America side, if you look at the revenue for the businesses a percentage of the loan assets, it came down about 60 basis points sequentially versus last quarter. Can you give us a sense for what was driving that?

What you're seeing in the retail business in general is ongoing spread compression is -- most of our retail business is primarily a deposit gathering business and then we use those deposits partly for loans in the retail business but also to fund our activities around the rest of place including higher return things like the cards business. So, the retail business as interest rates come down they see some spread compression in that business, and typically they invest out over a longer period of time on a caterpillar basis and so you will see that spread compression continue as the monies that they have placed out at higher rates rolls off and is replaced by monies at today's rate which are lower.

Fair enough. It just seems like a fairly significant compression from one quarter to the next but I guess given what was going on in the market I can understand it.

I think the other thing I would like to point out is that we are beginning to see a little bit of a pickup in the investment product sales which will overcome that to some degree but not to the degree that we would expect as you look out in the next few quarters. So, our expectation is the growth in investment product sales out of the retail branches will begin to overcome some of that spread compression.

Fair enough. Turning to the international slide, looking at all of the consumer businesses there, it seemed like that same ratio of revenue to assets picked up quite a lot sequential quarters. Is there a translation effect there and if there is can you give us some quantification of it?

There is a little bit of translation effect. We saw a little bit of benefit as a company from the weakening dollar in general, but it wasn't significant but it was a little bit helpful in the Retail Banking business. The other thing that probably had more impact on that was as I spoke about just now for the U.S. having the investment products pick up, we have had excellent performance especially in Asia in selling investment products through our retail branches and that drives revenue numbers that look pretty nice there.

Japan or non-Japan Asia or both?

Mostly non-Japan Asia.

If I could just come back to the domestic side for a second. Are you seeing any impacts in anyway competitively in the New York City market from the incursions of these guys who are opening branches on every quarter, the commerce and WaMu and North Fork (ph)?

That is a good question. It is one we've been asking ourselves as we have noticed, those of us who spends enough time in New York notice the same thing happening and we haven't seen that come through in anyway to damage our numbers in New York. We seem to be continuing to perform strongly with a number of customers we have and the revenues we have per branch in New York. So, if they're picking up customers they must be picking them up from somewhere else at this point.

Fair enough. Thanks very much.

Richard Strauss.

Deutsche. Just I guess if we look at the trading results in FX, I'm just curious, what was it that was driving that so much higher? Was that -- coming from Asia was that specifically the dollar/yen? Maybe you could just give us a sense on that?

FX trading was good performance this quarter as you said, up from last year and up from last quarter. It was, honestly it was a bunch of ins and outs, frankly some negative things that happened last year versus this year as well as pretty strong general performance across the board. We also had some specific hedges that were in place in Africa that was helpful. If there was one piece that was helpful, that was it. But in general it was good performance across the board in FX, decent positioning there.

Also I was kind of curious, the decline in equity, the sequential decline in equities trading given what your competitors have actually been showing this quarter, it has mostly been flat to actually up meaningfully. Maybe you could just comment on that. Was that coming from prop or maybe you could just give us a sense there?

I would perform that it was up as well as some of the others. I could talk about generally what is going on in the industry which you are as aware of as I am, but in terms of the prior quarter, there was some decrease as a result of some dividend trading gains that we actually got last quarter. So, last quarter was strong because of that. This quarter did not have it so it was a little but weaker. But I think in general in terms of our equity trading related revenue, we would like to see that line begin to pickup and look a bit stronger. We have talked about some of the restructuring and equity business that we done, some new leadership in there and we anticipate as we get into next year that we will start seeing some improvement in that business.

Finally, you mentioned things look like, credit-wise at least, that they were starting to show some improvement. Are you kind of calling a bottom in Japan consumer right now, number one? Your offices there have gone from close to 1,000 now to a little over 700. Are you about the right size in terms of where you want to be structure-wise?

I think it is close. We will probably bring that down by a fewer more branches but not to the same degree that you have seen already. We've also brought the people down commensurately. We are still doing some investments in consolidating those things and so frankly we are not seeing the kind of benefit yet on the expense line that we expect to see as you get out into next year. So, that will help the business income performance.

I think in terms of credit from what we can tell at this point, we are beginning to see the flattening and the, I call it modest improvement. It is not like it is going to improve dramatically over the next few quarters, but I think we should be able to see now the beginnings of some improvements of stabilization and then modest improvement continuing out into the next few quarters. I hesitate to call bottoms, but I think with the combination of marketing more aggressively at this point to the right customers, expenses coming down, and credit stabilizing or improving, we should be seeing the bottom of the net income as of last quarter.

Great. Thank you.

Andy Collins.

Good morning. Piper Jaffray. Just a couple of quick questions. In terms of the reserve releases that came in a few areas this quarter, I'm just wondering if we can expect that to continue or would we see kind of net charge-offs starting to ramp down with your improved outlook on the corporate side?

I think in terms of the credit reserves we talked about, there were some special things on the consumer side in Argentina as we saw some improvement there. We took a look at that and realized that we had more reserves than were justified on that side. On the corporate side, I think if we see what we expect, which is ongoing improvement in the corporate credit environment, continued reduction in our classified loans, a continued reduction in our cash basis loans, and a continued reduction and the expected losses then that we would have in that business, then you will see continued, or we will need to do some continued reductions in the level of the reserves that we have in that business as well.

Just one other unrelated question here. Profit margins in PCS hitting 22 percent. I guess that is a third quarter improvement. We saw a lot of asset inflows there. I'm just wondering what you might expect in terms of the profit margins out of PCS going forward?

I think we should see some improvement from this level as the equity markets have been friendlier obviously, up a bit, and that helps the fees we get on our asset based fees in that business. Trading volumes look like -- retail trading volumes look like they are coming back to more like normal levels, so revenues are beginning to improve.

I do think that we want to continue to make some investments in the business. We, over the past couple of years, really cut significantly anything that was discretionary, things like advertising and marketing, some of the discretionary support for the brokers and so I think we will want to reinvest a bit in the business. But I would hope to see a bit of expansion in the margin, but mostly in expansion on the revenue side.

Broadly speaking, you think that trading volumes and also kind of looking at the card a little bit more, that the economy seems to be trending a little bit better now?

I think there is no question that we saw descent second quarter in the U.S. economy. I think we're going to see very strong third quarter performance and fourth quarter performance in the U.S. economy. This is happening obviously with high productivity growth and so you have got what people are terming a jobless recovery. But from what I can tell and in talking to some of my peers at industrial companies and other companies who are CFOs there, you are beginning to see people feeling much better about making investment.

You are beginning to see companies feel much better about hiring and so I think you'll see that start to fade into employment a bit and investment a bit as we go out to the next couple quarters. Obviously, the question is how long will this go, how substantial it is? My guess is at this point the U.S. macroeconomic thinkers and monetary thinkers, the Alan Greenspans of the world and the John Snows of the world, are committed to getting a recovery here. So I think we will see it here.

I think you're beginning to see that stabilization in Latin America you are seeing, what seems to be some better performance than we had seen historically out of Japan. Asia looks actually very good. The estimates are to have much higher growth next year than what you saw this year. In Asia and Europe is probably lagging a little bit but doesn't seem like it is continuing to head down the way it was. All in all, I think all of the economy is still better for the next few quarters.

Great. Thank you.

Glenn Schorr.

UBS. Just beating that trading thing with a stick here. Trading account assets I see were up about 10 percent sequentially and a little bit lighter on the performance side than we would like. Could you make any comment on VAR (ph) or just overall comfort with market risk because obviously you want to view this in the context of big city?

Right. In terms of VAR, we have not been doing much in terms of taking additional risk. I would say in general the problem with VAR is that it is very hard to make comparisons across companies with VAR since everybody does it a bit differently. But, I would say in general this is a company that does not take much proprietary risk in what we do. Most of what we have done has been focused around customer trading and in fact there are folks here that believe that we do not take sufficient risks given our expertise and our size. Part of what you saw in trading assets was some of the derivative revaluations that were going on.

So bottom line is we can stay up here and it is still a comfortable level at 190?

Yes, I think that is fine.

Can we have just revisit thinking, I think we spoken about this once before, on the life business. This quarter actually ex the charges, it looked a lot better. Yet, there is still I guess about a 17 percent pretax margin and depending on which capital you count a single digit or low double-digit ROE. You do have excess capital and you have seen a ton of consolidation or at least the signs of consolidation in the space. The old comment was, want to be bigger or smaller but, not at this level. Does that still apply?

I think I definitely agree with you that again if you cut through any of the noise in the business, sales were up. You've got record levels of account balances in the business. They have been working on third party distribution as well as our proprietary distribution and that is going extremely well through a number of channels. Cost are under control. If you look at how they perform versus just about any other business like that out there, they tend to have lower-cost than many of their competitors and I think better risk performance as I think their underwriting is quite conservative and quite well done.

It is a well-run business. I do think we're seeing the turn in the business. You clearly are seeing consolidation industry and we expect that to occur, and one of the things that we have to decide is how we play that consolidation. The biggest thing to think about the life businesses is that when you consolidate you got to be thoughtful about why you're doing that because there is not a huge amount of cost to take out relative to some other types of consolidations. So at this point, I think we're comfortable with how the business performs. It is one of the highest return investment (indiscernible) out there and if opportunities present themselves we will have to take advantage of that.

Fair enough. How about switching over on the Asset Management side. Once again, ex any charges, performance pretty good with probably things getting better with the market looking up. A couple of big competitors made some big restructurings during the quarter and you guys started to dabble recently. Is there more dabbling coming? Are you focused on specific margins or is it just a constant evolving process with such behemoth of a franchise?

I think the Asset Management business, if you look at their expense run rate over the past few quarters, you can see -- and again you got to take out the DAK (ph) charge for this quarter, but you can see operating expenses have been trending down fairly significantly over the past few quarters and revenues are now beginning to pick up. And so I think we have worked hard at trying to rationalize the expense base of the business.

We have worked hard at trying to make sure we had the right marketing and wholesaling approach to our proprietary channels and I think again the business, like the life business, wants to look at how we can leverage the brand strength they have and the operating strength and the track record they have in now what is I believe a very high percentage of Morningstar 4 and 5 rated funds versus others, into some third party distribution.

I think most of the, if you would call it restructuring, most of the restructuring if you will on the expense side, is now done. It is something we have been doing over the past -- Tom Jones over there, has been leading that over the past 18 months. Now, you're really talking about how you think about growth in the business in what is a better equity market to get growth into.

Okay. That's great. Appreciate it.

Henry McVey.

Morgan Stanley. I wanted to pick on you a little bit. On the GCIB you seem excited about the results. I guess --.

Henry, did you notice the $4.7 billion of income?

When I look at that you've got -- your banking fees, actually Merrill (ph) actually earned more in the quarter despite having significantly lower marketshares and then when I look at the comp accruals, you're going to face another tough comparison going into the fourth-quarter. I'm trying to understand what, when you think about it looks like to me it is going to create another negative headwind on this operating leverage issue and then on the revenue side the market share numbers were up but it looked like the fee realization rate was down.

Let me talk about the operating leverage a little. We've spent a lot of time each quarter going through that because, frankly because it bugs us and we want to make sure that we are focused on it. We want to catch any expense growth before it happens. This quarter we talked about the incentive comp thing. Next quarter, we will have the same issue on incentive comp where because of the performance and the outlook of the capital market businesses in the fourth quarter last year, the comp accrual was, I will call it unusually low.

If you normalize that for this year then you'll see negative operating leverage in the capital markets and banking business. But again that operating leverage does not take into account change in credit. So, if you took credit into account I think you'll see that to be a more normal change. For Citigroup overall, obviously next quarter will have very good operating leverage because last year in the fourth quarter we took that large legal charge.

If you take that out, even that out, even if you take that out I think you will still see better performance fourth quarter revenue versus expense than what you saw this quarter, as we start to see some more normalization. Then as you go into next year we will continue to be focused on this. And again with the exception of some specific investments that we may or may not want to make as we think about the budget for '04, I think you'll see us go back to a more normalized level of revenued expense growth.

In '04?

In '04, yes.

Just two quick follow-ups. One was it looked on the the Retail Banking you put in the tax exceptionally strong performance in the mortgage business. What percentage of domestic Retail Banking was related to mortgages?

We don't break that out but the mortgage business did perform quite well this quarter. Along with everybody else's mortgage businesses performing quite well all year. I would say that if you look at the size of our mortgage business versus others, we are sort of number -- depending on if you look at servicing originations, sort of seven, eight, nine, much much smaller than others out there. The big guys would be people like Wells Fargo, Chase to some degree, B of A -- much bigger than we are. So it has a proportionally smaller impact on our numbers than it would for those folks.

Just one final. Just on the book value growth, it did not look like it grew much in the stockholders' equity. You got -- your accumulated was going, it went from 904 million positive to negative 492. How should we think about book value growth, particularly on the tangible side?

Which book value are you talking about?

In general it was up less than 2 percent and I would assume the tangible numbers right around there are less too. I'm just trying to figure out what is going on with the equity. If you look at the supplement on page 27, you had some things that have been positive moving to a negative direction. I'm just trying to figure out what it was related to.

Some negative that would have occurred to offset some of the income would be as interest rates move a bit and they moved up a bit in the quarter, then the securities that we have, especially the ones that in the life business which are mostly fixed income, would go down a bit. You have essentially a reduction in the unrealized gains that we have in those securities.

That would be a piece of it. We've got some, in some cases you got some reductions because of foreign exchange from capital that we have around the world that -- we tend to hedge our tangible capital around the rest of the world but not our intangibles. So some of that reduction would have been in the intangible (indiscernible).

Thank you.

Mike Mayo.

Prudential Equity Group. How much of the classified assets declined this quarter?

That is not a number we put out, but I would say it is in the order of the same percentage as what we saw in the cash basis loans decline.

Why was there margin pressure in the U.S. retail bank?

We went through that before. It has to do with the fact that interest rates are low. It is mostly deposit gathering and then a deposit gathering business that then provides funds to the rest of the corporation. So if the interest rates are down, then the amount of money they get on those funds go down and if -- which is true. If a lot of their deposits are based on zero cost deposits, their zero cost checking accounts and things like that, as your interest rate that you can lend goes down, you cannot get money for less than 0, so you get a bit of a squeeze there.

And corporate loan demand, any change when dealing with say fortune 1000 corporations?

You can see that our on-book loans in the corporate side are down this quarter. And I think in general, there is on the one hand a fairly tight credit screen now that we have and probably the others have across the banking industry to give out new loans and I think given the amount of capital markets activity that has happened, most people are issuing bonds rather than doing loans at this point.

Is Sandy still there?

No.

Okay. Then my question, in terms of appetite for acquisitions I think you were saying before Retail Banking followed by some other areas. Do you have an appetite to buy more mortgage banking? What is your appetite priority now?

I think pretty much the same as we have talked about before. Retail Banking is clearly a focus for us. When you buy a Retail Bank you tend to get things like a mortgage business, so that would probably come with Retail Banking, but it is not something that we would at this point go out and target a mortgage business per se, but rather we would be interested in the Retail Banking piece of that. As always, we are interested in some of the high net worth business, asset management business, transaction services businesses which tend to be stable high return businesses, if we can buy those for reasonable prices.

The Sears acquisition, how much in charges will you take for that to conform their credit reserving to bank standards?

Nothing that would go through the P&L, first of all. Secondly I think we are going to try to go through in detail with you, the other analysts and investors, on the close exactly what comes on our books and how were going to handle it.

Okay. Thank you.

Erin Caddell

Blaylock & Partners. I just wanted to go back to the investment banking revenue lines, a bit more on the primary side, debt underwriting, equity underwriting and advisory. Could you give a little more color on the sequential performance there and the trends you are seeing going forward, maybe ex the corporate loan stuff but more focused on M&A as well as equity and debt underwriting?

Sure. Let me go back to the equity underwriting, debt underwriting and M&A. I think in that business what you're seeing happen is mostly at this point cyclical, which is normally you see very strong fixed income performance in the first quarter and then it tends to tail off during the year and you saw that again happen this year like it happens in most years. The difference this year is that this quarter, the third quarter, tended to be a bit stronger in underwriting than historically as rates continue to be low.

So, the performance was stronger in the third quarter this year than what you saw a year ago. But trending down during the year and normally you would see that continue to trend down into the fourth quarter and then pick up again into the first quarter. So that is the normal cyclical thing that happens. More secularly, I think the question is going to be what happens to interest rates here because I do think there is still a fair amount of demand for additional fixed income product if rates stay in credit spreads which also have come down -- come in substantially, stay where they are today.

So, as we get into the first quarter and second quarter of next year, if we continue to see this type of a friendly rate environment and a friendly credit spread environment, I think you'll see continued strong underwriting performance in fixed income. I think in Equity Underwriting, you have had relatively weak performance in general and it has been weak now for about 18 months and then in some quarters it picks up a bit and there is a couple of big deals that happen that help out a few players across the street, sometimes it's us and sometimes it's others, and then those go away and you see a return to what is an ongoing relatively weak volume of Equity Underwriting.

I believe that there is a fair amount of pent-up demand for Equity Underwritings for IPOs and other secondaries as some companies look to restructure their balance sheets and as the IPO market has been essentially almost closed for the last couple of years, there is demand from some private companies to begin going public. So, I believe that will begin to turn and the question will be when? Is it turning next quarter, is it turning over the next few quarters? The pipeline at this point is not particularly robust, I believe across the street.

So again there is some deals that happen every once in a while and some base amount of work that gets done, but it is not what I think I or others across the street would term as robust. But at some point that will turn and I would guess that as we continue to see improvements in the economies and friendlier investment markets for IPOs and for equities, that you will begin to see that pickup relatively rapidly. In terms of advisory fees, the M&A environment has also been very weak. It is down from last quarter, it is down from year-ago. I have been saying and others have been saying at some point that will turn.

You're beginning to see some deals get done, you're beginning to see buyers feeling a little bit more confident, so they are out there starting to look at deals and do deals and you are beginning to see sellers willing to sell at the prices that exist out there today. So you are starting to see, if you will, a clearing of the market for M&A. And again as we go out into first and second quarter of next year, I at least believe you're going to start seeing some more robust M&A environment than what we have seen so far. That is off of a very low base. There is a lot of of room for improvement there.

Okay. That's helpful. Thanks.

Lehman Brothers. Question on the card business. With the Home Depot acquisition coming on, I thought the receivables growth was relatively weak even in the period and the period adjusting for that. You mentioned the tailing off of the teaser rate products. Is there anything else going on there that would retard the growth rate?

That is really the story. We made the determination that we felt the economics around the teaser rates had worsened and that we were going to ramp back that business substantially and so we have -- again you can see the benefit of that in higher net investment margin -- I'm sorry, higher net interest margin, higher NIM. So, back-ons tend to come in at very low rates or zero rates, and they obviously cost us money.

So as those have come down, our profit margins of gone up. You have not seen growth as much as if we had gone out and continued to advertise aggressively for those types of things. Again we've got $30 billion or so of Sears receivables coming on the books sometime in November. So we felt comfortable that we could dial back a bit on Val (ph) cards. We are still going to see substantial growth in the portfolio for the year.

Okay. As a follow-up --.

One other thing I did want to mention. we did -- also during the quarter we sold the Sony credit card. This was something that we had a cobranded card with Sony, they ran a competition, they gave the business we competed, they gave the business to another player in the industry and so as is natural in that business, we've then sell the existing book of receivables to that player. So that was about $1.5 billion of receivables that went with that sale, as well.

Great. That's helpful. A follow-up in terms of the investment bank and the comp to revenue ratio, a follow-up to a prior question. There has been a lot of volatility within that ratio. Again, what should we expect for the fourth quarter and next year in that level? I was surprised at the decline in Q3?

Again, the way we try to manage it is not comp to net revenue, but comp to risk-adjusted revenues. So, if you look at that line, you'll see more stability then you would have against the other. But, partly we try to do a buildup of the different pieces of the business, and so as the mix of the business changes, the comped accruals as a percent of revenues for different types of businesses have different rates and so as the mix changes you will see the absolute number change as well.

Got it. Thank you.

Thank you very much everyone for joining us today. If you have any follow-up questions, please feel free to give us a call. Bye.

Thank you.

That concludes today's conference. At this time you may disconnect your lines.