花旗銀行 (C) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Citigroup's fourth quarter 2003 earnings review, featuring Citigroup Chief Executive, Chuck Prince; 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.

Thank you for joining us today.

Chuck Prince, our Chief Executive Officer will kick off the call with some remarks, and he will then turn it over to Todd would will take us through the presentation and then be happy to answer any questions that you have.

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

Thank you, Sheri, and good afternoon, everybody.

It's another earnings day.

It's a busy day here at Citigroup.

I stepped out of our board meeting to get this started as many of you may have seen, we just raised our dividends.

So we are having a busy day here.

But I do want to make a few introductory comments before I turn it over to Todd to do his usual great job of going through the numbers on a detailed basis.

We had a great quarter and a great year overall.

We had excellent financial results.

We had record earnings again.

Sorry to be boring that way.

And we had excellent return on equity.

Twenty percent on $100 billion of equity is -- there aren't many companies that can approach that level of performance year in and year out.

We also had very good sustained increasing revenue growth over the course of the year, 13% in the quarter, 9% for the year.

And our results were record, even with dealing quickly with Parmalat, and with some pretty important investments in growth for 2004 and the future.

I think this reflects the broad diversified nature of our business mix.

It is really a very unique global franchise.

I also want to mention our thoughts on 2004 briefly.

We have very good momentum going into '04.

As I said revenue growth accelerated over the course of the year.

Todd has a very instructive chart in the presentation which he will discuss which involves the growth in our customer balances, which shows how we go into the year and, I think, with real momentum; and I especially want to call out the impressive growth that we see and are looking for in international.

This is a very important area for us.

The international economy is improving, and I think that there's no one like Citigroup that can capitalize on these increasing opportunities in the international area.

I want to, in that regard, single out for a compliment, our team in China.

We just had a really good run in China recently with the China Life underwriting.

We're about to launch our first credit card in China.

And I personally am spending a lot of time going back and forth there and working with the team there.

It feels very good to me in how -- how the business is progressing there.

Of course, there are areas where we are still working hard.

Nothing is ever 100% one way or the other, and I think that areas that we want to focus on, and continuing to fix the business are areas like consumer finance and equities trading; and I think that you should expect, as we expect, real improvement and real demonstrated increases in results in those areas in 2004.

We do have an overall focus on the business, which I would like to mention, and highlight a little bit, and that is in the active management of our business mix.

You've seen some targeted acquisitions in '03.

We made a decision to increase and extend our franchise in the private label business, and now we're the largest issuer of those cards.

We made a targeted acquisition in consumer finance from WaMu, and I think you will see he targeted acquisitions like that, that extend the franchise; as I said, especially in the international area over the course of the year.

And also in that regard, some targeted dispositions.

We're in the mode of measuring our businesses very carefully and those that are not long-term core businesses I think you will see more and more of us getting out of those businesses over the course of 2004.

Between our momentum, between these targeted acquisitions, I think you're going to see very -- very significant, positive operating leverage.

I said that in the past.

One of our focuses is positive operating leverage and that's still something that's front and center for us as the year goes along.

So overall, we feel very good about our results.

We feel very good about the prospects for '04.

I must say we're optimistic about getting on with the year and really getting at it.

Now, before I turn it over to Todd, I've had questions from any number of people about the JP Morgan-Bank One deal, and this is an efficient way for me to give a comment or two about that so I will do that now if I may.

My thoughts on that transaction are, first and foremost, colored by the fact that I know the people very well.

Jamie is a dear friend of mine and many of the people in the Bank One management leadership are former colleagues, and people that I know and like and respect; and while I know Bill Harrison less well, I know him well enough to like him and respect him.

I think this is a great transaction for the people involved, and from a people standpoint I couldn't be happier for my friends in terms of this transaction.

I think it's also a good deal for the two companies, and I think it validates our business model.

And it's something where after a year or two of getting ready to close, and then closing and integrating the business; after that period of time, they will build something which will compete with parts of our business.

And I think that's good.

A smarter, stronger, competitor is good for us.

It will bring out the best in us.

It will make the marketplace a better place to compete in.

Now, obviously, Citi is much broader than that, with a much different combination of businesses.

We're bigger and more diversified, we have a higher earnings base.

But in the areas where we are going to compete in the future, I think it will be good for both of us.

And, of course we're not standing still in any of our businesses so whether it's in that area where we are going to compete, or areas where they are not on the same page, we'll continue to move ahead.

We have a growth plan.

We expect double digit growth and we're committed to that.

I would say that the growth plan that we have, the earnings momentum we've got, the execution we've got going inside the company, I would just say we expect to continue outperform the industry however it is configured.

So, again, my compliments and my congratulations to my former colleagues, and it's, I think, good.

Enough on that.

Well, I'm going to go back to our board meeting.

Todd, as Sandy says, don't screw it up. [ LAUGHTER ] And we'll to you all later.

Thank you, Chuck.

What I will do is walk through the presentation and then we'll get to any of your questions that you might have.

I think the fourth quarter saw what I think was a continuation of the themes we've seen actually throughout the year, which is accelerating strong global growth.

Good growth in the U.S., good growth, actually, in Japan.

Very strong growth in Asia.

Stabilization and turn around in Latin America.

And really the only place in the world which is seeing real weakness right now continues to be Europe.

And with the Euro continuing to increase, that's put continued pressure on the economy there.

Robust equity markets rebounding after three straight years of decline, although trading volumes declined in fourth quarter from a year ago; and an improving corporate and consumer credit environment.

Bankruptcies actually down in the fourth quarter from the third quarter, and down from the fourth quarter a year ago.

That's the first time in four years that we've seen a year-on-year decrease in the number of bankruptcies.

That's a positive sign.

The credit spreads continuing to tighten in.

Consumer continues to be pretty strong in the U.S.

Our Citicards sales per active account up very strongly in the fourth quarter and, again an accelerating increase from first to second to third to fourth in Citicard sales; so that bodes well for continued strength in the consumer part of the economy.

And we're seeing improvement on the corporate side as well.

Interest rate curve actually ended the year about where it started, despite some significant volatility; and the market continuing to price in rate hikes, and so the rate hike that the market continues to expect haven't come true yet.

Obviously at some point in the future they will.

So that's been sort of the environment.

In that environment, let me move to the numbers.

If you turn to the highlights on page 2, I would say that, you know, in this environment, we saw very strong customer flows across our business, leading to record financial performance for the quarter; $4.76 billion in net income for the quarter, revenues up 13%.

As well as very strong record performance for the year; $17.85 billion dollars of after-tax income for the year, up 33% from a year ago.

So the quick summary is record financial performance in both revenues and income, while overcoming potholes throughout the year.

Things like the poor performance of the Japan consumer finance business, being victimized by an apparent massive fraud at Parmalat, and while investing significantly to drive our future performance.

And I will talk a little bit about that in a few minutes.

Let me move to the full year P&L on page 3.

Revenues of $77 billion, that's a record amount of revenues for us, up 9% from the previous year.

Operating expenses up 5%, credit costs improved by nearly 20%.

So pre-tax income up 28%, income taxes up 20%, and so our continued focus on -- on tax planning has been paying off for us throughout the year.

The tax rate for the year was about 31.1%, about 30.6% in the fourth quarter; and that's really a testament to continued focus on the international tax planning that we've been doing, as well as having the benefit throughout the year of a number of tax settlements.

We talked about that ones in Japan.

We also had various smaller state and local and federal settlements.

We talked about the associates tax release of $200 million last quarter, and we also had an increase in tax advantage investments; which tends to decrease the revenue, but also decrease your tax rate.

So 31.1% tax rate for the year.

And, you know, I think that as you look out into '04, you should see, you know, an ongoing tax rate in the 32 to 31% kind of range.

Which I think is okay, but something we still need to focus on.

That's still substantially higher than most of our global peers who tend to run a tax rate in the mid-20s and some of them are actually mid to high teens.

So our income from continuing ops after taxes $17.9 or $17.85 billion, up 33%.

On the next page, you can see from a quarterly progression point of view; during the year we made $4.1 billion, and $4.3 billion, and then $4.7 billion, and now $4.8 billion in the fourth quarter.

And if you normalize for the litigation charge that we took at the end of '02, $1.3 billion, our income increase was still 21% for the year.

And then during the year we made a number of targeted acquisitions.

We closed the Sears and Home Depot and Forum Financial acquisitions.

We also announced the WaMu finance acquisition, which has now closed on January 9th.

We closed the sale of Citicapital fleet services, and we also announced the sale of electronic financial services business.

Again, these are the non-core businesses for us, and that EFS sale is actually closed now as of January 5th.

So that will be a first quarter event.

So good progress, I think on acquisitions and divestitures.

Trying to make sure that we have a portfolio that's highly focused, and we're investing our capital in the core businesses that we are trying to grow.

There's been a lot of discussion about organic versus acquisitions growth, and for the year our organic growth was 28%, 16% ex the legal charge.

By segment on the next page, we saw strong performance for each segment for the year, except private client, which is now seeing some very good momentum in the fourth quarter.

I will get to that when we talk about the quarters.

But global consumer up 17%.

Global corporate investment banking up 71%.

Up 20% ex the legal charge.

Private client I just mentioned.

Investment management up 11%, and then we saw the rebound in proprietary investment activities from a loss last year, to a modest positive this year; and also continued good performance in corporate other as interest rates have stayed down, treasury performance has been very positive and we had some good tax performance that showed up in that line as well.

So income from continuing ops, again, $17.85 billion.

We also in 2002 continued to have the income from Travelers Property and Casualty, which has since been spun off to our shareholders.

So on a net income basis, income was up 17%.

Fifty-five percent of the business this year was consumer business.

So good mix of business between consumer and corporate, private client investment management, and 35% of our income was from international sources.

Now, while delivering on what I think was good financial performance, we also worked very hard to build our customer balances in each of our businesses during 2003.

So we wanted to enter 2004 with each of our businesses poised for further growth and on page 6, you can see for each of our nine businesses the customer balance changed during the year.

You know, from transaction services with assets under custody up 25%, now almost $6.5 trillion assets under custody.

Managed cards receivables up 24%, now to $164 billion in total globally.

Private client assets crossing the trillion dollar mark with $1.1 trillion, up 20% from a year ago.

Retail banking deposits up 10%.

We're now over $240 billion in retail deposits on a global basis and the only thing that was down during the year was corporate loans, where, again, we're very careful about how we give out credit and who we give out credit to as part of an overall relationship with customers.

So overall, going into 2004, with customer balances 10 to 20% higher than when we entered 2003.

Now, it's important not only to have that kind of growth, but to have that growth happen profitably.

And on the next page you can see that we've maintained or improved our leading margin positions in every business.

So continued good focus on expenses and managing our businesses for profitability, as well as for growth.

Moving to page 8, we also did some key initiatives during the year, increased our dividend by 94%.

Chuck mentioned we also this morning the board approved an increase in the dividends of another 14%, or 5 cents per share per quarter; 20 cents per share for the year.

We also, we talked about our non-core dispositions, things like EFS.

And we worked hard during the year to also improve our capital liquidity profiles.

We had 10% growth in deposits on the retail side.

We extended the maturities and continued to diversify the funding sources for our debt and increased our total equity by $11.2 billion dollars during the year.

And have successfully completed the CEO succession.

Let me move to the quarter, quickly on the next page, revenue up 13%.

Over $20 billion in revenue for the first time.

Very good customer volumes across each of our businesses.

Again, global consumer continuing to have strong performance, up 14%.

Corporate investment banking up off of a loss of last year.

If you adjust back for the $1.3 billion litigation charge of a year ago, they were up 28%.

Private client services, that's the highest quarterly income result for them for three years.

So very strong results there and beginning to see very good momentum in that business.

Investment management relatively flat.

Proprietary investment activity, decent quarter.

And then corporate other, continued good performance out of treasury was driving that positive for the quarter.

So 91 cents a share, up 94%, or, again, adjusting for litigation charge of a year ago, up 25%.

Let me spend a minute now on Parmalat, included in those results was $242 million after-tax charge for Parmalat; most of that was in the GCIB.

On page 10, I'm going through the pre-tax numbers now.

Let me start with our overall exposure.

We entered the Parmalat situation, which appears to be a massive fraud, which we were one of the victims.

We entered there with exposure of $689 million, and that's consisted of about $400 million of assets that were secured by third-party receivables, about $255 of unsecured exposure; and then we had trading exposure which consisted of our credit default swaps offset by derivatives counterparty exposures and other trading positions of a net of $36 million.

So just shy of $700 million of total exposure, of which $400 million was secured.

And we had a credit relationship with Parmalat entities in more than 10 countries around the world, and we provided funding secured by third-party receivables in a number conduits in a number of those places.

This quarter we wrote off or reserved for, on the credit side, $351 million; and then on the trading side we had a mark-to-market net loss of $21 million so that leaves us with about $300 million of secured exposure, or $300 million of mostly secured exposure and about $15 million of trading exposure remaining.

You can see on the right-hand side of that slide, the pre-tax impact by regions.

This was not just an Italy issue.

Parmalat had large operations in Brazil, so you can see the loss in Latin America.

They they had operations here in the U.S. and in Canada.

And Australia, and Japan.

So you can see on the right-hand side how that flowed through our regional P&Ls.

In terms of the remaining exposure, we're working to perfect our security on each of those.

We feel very good on it in some of the locations and in other locations we feel less good, which is why we've taken some reserves against the secured exposure to be conservative at this point.

Let me move past Parmalat and talk about performance by business.

I just want to highlight some of the real stars in the quarter, private client I mentioned, before up 39%, transaction services performance, which is mostly improvement in credit, up almost 50%.

And then you can see life insurance and annuities was down as they had a reduction in the -- the investment income in that business.

And then consumer finance, which continues to be a year-on-year comparison in Japan consumer finance, which is a negative.

So we have, you know, work to do there.

We are seeing some stabilization in Japan.

Essentially the same income this quarter as we saw last quarter so that's stabilizing.

We began to see some improvement in credit results in Japan.

From a regional perspective, you can see Parmalat flowed through to the EMEA results; and the consumer finance issue in Japan.

I want to point out that highlight Asia has a particularly good performance, as we're seeing very strong performance for us in very strong economies in India, Korea, and China.

As well as most of the rest of the Asian countries.

Let me walk through some of these businesses quickly.

Next to page 12, cards you can see managed receivables up 24%.

A lot of that was Sears and Home Depot.

I will talk about the private label business in the next slide; but we saw very good international sales up 29%, driven by growth in Asia.

And we've changed our marketing proposition.

So we've moved away from the balance con marketing to security from identity theft, and that seems to be working quite well at this point.

That's helping to increase our returns so you can see the return on managed assets is now up to 2.87%.

In consumer finance in North America, beginning to see some growth there, revenues up 7%; 10% average loan growth in that business, so that business is beginning to look better.

NCL ratio actually improved versus third quarter.

And then the international side it's, again, really about Japan.

We did see the net credit loss ratio decline, almost 70 basis points versus the third quarter.

For international consumer finance, and so we feel like that business is stabilized at this point.

Retail banking North America, up 24% in the quarter, deposits up 10% overall.

And we had a falloff from third quarter performance and that mostly had to do with mortgage originations being down from third quarter.

The mortgage pipeline is now down 40% from last quarter.

Of course, we'll have to see what happens with the interest rates here.

International retail banking continues very strong performance.

Revenues are up 17%.

And excellent performance in EMEA, as well as Asia where we're seeing a large increase in investment product sales.

Private label cards on the next slide, page 13, quite a success story.

So we started back in December a year ago with only $7.4 billion of receivables.

We were ranked number three.

We're now by far the number one player in the industry with $29 billion of receivables driven by the acquisition of the Home Depot portfolio, as well as Sears portfolio.

Home Depot, we acquired in August; $6.4 billion.

It was really a landmark deal.

It was the single largest private label portfolio to change hands at that time.

And Sears $28.6 billion as we closed it this quarter; $16.5 billion of that was private label, the rest was bank card.

We completed that in November.

The largest card transaction in history and that was previously in-house with Sears.

The partnership has been excellent.

The integration is going very well.

We are already seeing significant improvement in the collections, as we have taken our technology and our approaches to collections.

And already it's outperforming our expectations on the credit loss side as with result of that.

We're also, as we begin to work with our partners in Sears and Home Depot, the retailers to build out other parts of our business; we're testing Mexico cash transfer service beginning late this quarter, late first quarter.

We have expanded our disclosure now for cards, so that you can see separately the performance of the private label business and the bank card business; and I put that down here on the left-hand side of that slide.

So you can see the characteristics are slightly different.

The net interest revenue on private label running over 17% and bank card running about 11%.

Credit losses actually look relatively similar as we reported them this quarter; but because we bought the Home Depot business, we only bought the good portfolio out of Home Depot that's understated on the private label side.

We would expect on a normalized basis have loss rates more in the 9 to 10% range, and we expect the return on assets to be 2 to 3% in both cases.

So a terrific success story.

We're very excited about building this type of scale in the U.S., work with our retailer partners to build other parts of our business, and also to be able to take this internationally where it's quite interesting business around the world.

Page 14, global corporate investment banking, good performance up 26% in capital markets and banking in the quarter.

And you can see that from a revenue point of view, investment banking revenues were quite strong, up 8%.

They've continued strong most of the year.

Debt underwriting looking very good.

Equity underwriting also very strong, you can see we had a very good quarter in equity underwriting in the fourth quarter;

China Life contributed to that.

And advisory and other also performing quite strongly.

So investment banking revenues look good.

Trading-related revenues, fixed income were up 23% overall.

Fixed income continues to be over $1 billion and very good performance there.

The equities trading-related revenue, however, is pretty weak.

As you can see, it was $59 million for the quarter.

Better than a year ago when it was negative, but not nearly what it was third quarter, and not nearly what we believe it should be.

That's something that we talked about at the global corporate investment day is a real focus for the business to build the equity trading area, improve our positions in derivatives, and improve our cash trading profitability; so you should expect to see that that number improves as we go out to 2004.

We'll have a real focus on that and then FX trading continues to be a relatively strong, although not quite as strong as last quarter as we saw reduced volatility out in Asia, which reduced some of our FX trading profitability.

Operating expenses were up a lot as a result of higher incentive comp this year as we had a much better year.

And the provision for credit losses declined substantially from a year ago.

Transaction services, really investing to grow this business.

You can see -- although the income was up a lot, most of that had to do with the cost of the credit, declining substantially.

But more importantly, the liability balances were up 21% and the assets under custody up 25%.

So we're investing significantly in the business to be able to grow that in the future.

Page 15 continued very strong performance overall in underwriting for the global corporate investment bank.

Once again, number one in global debt and equity.

Number one in global long-term debt.

We were number two for the year in global equity, but number one in the fourth quarter.

Ninth consecutive quarter number one in global debt and equity disclosed fees.

Three unannounced M&A, and two incompleted M&A.

And on the right-hand side you can see that from underwriting fee perspective, you know, really running 70% higher than the other major players in the business; so continue to have a very good position there.

Page 16, private client services, again, very good story in the quarter.

Very nice momentum in the business.

We had net flows of $9 billion in the quarter; $28 billion for the year.

Very nice pre-tax profit margin.

The highest in the industry of 25%.

Continued to build client assets and fee-based assets very strongly.

Page 13, life insurance and annuities, really a story of two issues.

On the one hand business momentum continues to grow very nicely.

We're seeing good sales momentum, whether it's individual annuities or group annuities or life net written premiums, so all of that looks good; however, from an income perspective, we're having, you know, continued lower retained investment margin as higher rate investments that we had previously invested in continue to roll off and we reinvest that in today's low rate environment.

The other very good news is Japan variable annuity sales.

You know, once again we're over $1 billion in the quarter, $1.2 billion and an interesting tidbit you might want to know is that for the first time we actually had higher variable annuity sales in Japan than the U.S.

So very good momentum in that business.

Private bank continues to roll along.

Eighth consecutive quarter of record earnings.

Client business volumes up 15% from a year ago.

Revenue growth continues to be strong and 19% income growth from last quarter and for the year.

Asset management, good flows and AUMs up, continue to have issues with some legal expenses there.

We had disclosed the transfer agent legal matter, and that cost us some money during the quarter.

So we continue to work through some of the -- some of the issues there.

As you might imagine there's a lot of expense just making sure that we don't have any of the issues that have been in the paper so much recently.

So that's the business summary.

Quickly, on credit, the story on credit on the consumer side, page 18 is really a continued benign environment.

You can see that our NCLs ticked up a little bit but actually came down if you took out Sears.

So good performance there and delinquencies continue to be flat.

It remains a very good environment in the U.S. and around the world, with a little bit of exception in Germany where we expect NCLs to continue to increase throughout the year a bit.

On the corporate side, on the next page, credit costs down substantially from '02 with Parmalat being a very big piece of our overall provision for credit in 2003.

Without that, it would have been extremely good performance.

And at the same time, you're seeing improvements, Parmalat aside, in the underlying statistics of the business.

So $370 million reduction in our cash basis loans from the third quarter.

Continued reduction in our classified loans, and our classified two and worst loans; and as a result of those underlying improvements in the portfolio, we released $200 million.

That's obviously pre-tax, from the general reserve in the quarter.

On page 20, operating leverage, revenue growth of 9%, expense growth of 5%; and I want to highlight in addition to the headwinds which we talked about throughout the year $450 million increases in our expenses as a result of expensing options for the first time, as well as increased pension costs.

We also made significant investments during the year to improve our competitiveness and to grow the business for the future; $650 million more that we spent on advertising and marketing and technology and front-end expansion and product development and restructuring our businesses than we spent in 2002.

And, again, having those investments while still, we think, delivering good financial results.

I just want to make a comment about the headwinds.

You should expect that with we will see a further increase in these 2003 expense headwinds going out into 2004.

And so this was our first year of expensing options.

Next year you will see an additional cost from expensing options above the cost we had this year, you will see higher costs for pension and insurance again.

The DAK year on year variance should moderate a lot, but I would expect that those headwinds will be another increase of about $400 to $450 million going into '04.

Capital discipline.

We ended the year with $104 billion of total stockholders equity, including trust preferreds.

We built our capital ratios during the year, so despite spending $5.7 billion for dividends and $2.4 billion for share repurchases and $8.8 billion for acquisitions, in capital, and $2.2 billion in organic asset growth; we improved our capital positions during the year.

Tier 1 is up to 8.9% and total capital ratio is up to 12%.

GAAP assets just under $1.3 trillion.

We purchased another 13 million shares during the quarter, which gave us 62 million in total that we repurchased during the year for $2.4 billion; and our return on equity continues to be quite strong.

Let me now talk a little bit about the outlook for '04, by business, and let me start actually by turning back the clock to what we said going into '03.

And so page 22 says here is what we went through with you on what we expected in 2003 by business.

First of all we said overall that Citigroup should be able to grow income double digit even adding back the legal charge from a year ago and dealing with the headwinds on expenses from options, et cetera that we expected and we give ourselves a check mark for that.

So we were able to grow income overall by 21%.

And then by business, we said we thought cards could grow double digit and it did.

We thought consumer finance could grow at single digit and it did not.

So I had a bad outlook on that.

The issue there was the North America did grow single digits, but Japan performance took longer to turn around than we had hoped for and expected; and that caused the overall business to be down 12%, rather than up single digits.

We were wrong on that one.

Retail banking, we expect a double digit increase, in fact up 38%.

Capital markets did well, and continues to lead the industry in disclosed fees and overall profitability and margin.

Transaction services was as expected.

Private client, again, I was wrong in that.

We expected to bounce back to occur with the private client customers much more quickly than it did.

Obviously, fourth quarter was very good but the first three he quarters were not.

So, in fact, the business was down for the year.

Life insurance, we expected flat.

That was up for the year, mostly due to the change in realized gains and losses.

Private bank performed as expected.

And then asset management we expected an increase and, in fact, we were wrong there.

It was a decline and that was driven primarily by the fact that we took losses in the retirement services business in Argentina during 2003.

So we were six for nine, or 7 for 10, if you include overall Citigroup performance.

Again, it shows the importance of having a diversified business set.

Some businesses outperformed and some underperformed.

So there is our score card for how we did in '03.

Let me he turn to '04 outlook.

I think for '04 it looks to be a good environment to do business.

We have decent global growth going on.

I think there's pent-up corporate demand for deals and equity.

A benign credit environment for the time being.

And the monetary policy is likely to remain accommodative I think for a while.

So in that environment by business, we expect to see continued double digit growth in income for the cards.

We have, obviously the Sears and Home Depot integrations that are going well, but we expect continued strong growth in international cards business.

Consumer finance I'm going to try again on growth there.

I think we'll get double digit growth.

The momentum is clearly turning in North America very positively and we have the WaMu finance integration which should be accretive for us in '04.

Japan does really seem to be stabilizing and we hope it's at least not -- we expect that it is at least not the drag that it was this year.

Retail banking should be up double digit and that's despite what we think will be a weaker environment for mortgages overall.

We do expect it to continue to take share in mortgages and a real wealth management focus around the world in increasing our investment product sales through our retail branches.

Capital markets and banking we expect to continue to outperform the industry.

Obviously the issue there is going to be what that handoff looks like between what has been very robust, fixed income, origination, and trading, and what had been weaker origination and trading in -- in equities and a relatively week M&A environment.

We'll have to see how that plays out, but in any case we'd expect to outperform the industry.

We've talked about some of the specific areas we really want to target for increased improvement, including equity trading.

Transaction services we expect to start seeing some top line growth there.

And we'll start seeing the advantage of having Forum Financial in the fold.

Private client services has terrific momentum, expect double digit growth there.

Life insurance, we expect continued weaker performance, up single digit increasing volumes but, again, moderated by a tough investment environment.

Private bank we expect to continue its double digit growth performance.

And then asset management, we expect-- we'll see, I think the benefit of good net flows and AUM growth throughout '03; but it's a little bit tough to call the profitability in that industry, given, you know, all the regulatory focus that's on the industry that tends to be a bit distracting for the business.

So that's our outlook by business.

So then our focuses for '04 by turning to the final slide on page 24, is really to take the unique strengths of the Citigroup franchise; things like the leading global brand, the fact that we have leading businesses in each area in which we compete that are operating and funding cost advantages which lead to leading margins, and focus on some very specific priorities for ' 04.

And those include, for each business, grow share, we have relatively small global market shares; and we should be able to improve on those in every one of our businesses.

To target some very specific growth opportunities.

There are areas where, you know, we haven't really been able to capture profitability the way we think we can.

Things like private label, wealth management area, we think has a lot of growth potential.

Asia, I think is booming.

Chuck talked about some of the things we're doing in China, but it's not just China.

It's India.

It's Korea.

It's other parts of Asia, that looks like a very good place right now.

It's other parts of Asia.

That looks good right now.

Derivatives, where we've been really underplaying our strengths there.

Distressed debt we're going after in a meaningful way for the first time.

So there are a number of profit pools that we haven't really addressed in the past that we're going to have a real focus on in 2004.

And then continued proactive portfolio management.

We expect we'll make continued targeted acquisitions during the year, and I think we have some more things that we can -- some more hobbies that we can look to get out of.

And if we do that well, we expect to perform well for shareholders with double digit earnings growth and superior returns; and as we talked about earlier already increased the dividend another 14%.

So, again, I apologize it's a little bit longer presentation than normal because we had to go through both the quarter and the year.

With that, let me turn to questions you might have.

Thank you.

At this time, if you would like to ask a question, please press star one on your touch-tone phone phone.

Richard Strauss your line is open, please state your company name.

Okay.

Thank you, Deutsche.

Good afternoon, Todd.

Just a couple of questions here.

First I know equities is an area that you said you would focus on this year.

In terms of what exactly happened in the quarter, was the weakness, was this overnight?

Was this derivatives?

Was this the loss of share in the cash business?

And when you talk about a remedy going forward, you know, maybe you could just get a little bit more specific as to the plan.

Yeah, I think it was a couple of different things, Richard.

One it was certainly derivatives.

There was lower customer flow, lower customer business in the fourth quarter than what we saw in the third quarter.

And then secondly there was higher volatility which caused us to take some additional liquidity reserves; so write-downs, if you will, in our book derivatives.

Those two pieces in derivatives; and then, in addition, we lost a little bit of share in the cash business and margins continued to come down in the cash business.

And so that hurts our profitability as well.

I think, you know, we talked a lot about the fact that I think we punched much below our weight in our share of equity derivatives.

I think we can do much better there.

And I know that Bob Druskin, who runs the global corporate investment bank, as well as Jamie who runs the equity business are very focused on building our share in that business.

So I think you will see some growth in that business over time.

I think on the cash trading side, there are a number of things that we are focused on.

First of all, we should have more share in cash trading.

We lost some share during the quarter.

I think we will get that back.

Our research coverage has been expanded, and so I think we'll start to see that coming back in the first quarter.

But then secondly, I think margins are going to continue to come down in that business which means you have to really focus on the expense side, and we're investing in some technology to improve the cost of executing some of the trades as well.

Okay.

And then looking at the insurance portfolio, you talked about the drop in the yield.

But it was pretty substantial, about 60 basis points and a 660 rate last quarter.

You said some higher investing assets, I guess ran off.

Was this -- are you -- was this mostly mortgage-related type assets and are you most of the way through this now?

And what would your guidance be on the portfolio going forward?

I think it was a couple of things.

One is generically, obviously the things that were invested in three, four years ago were at higher rates than today.

That's just been happening over the last few years and will continue to happen a bit but there are some specific things as well.

We happened to have some very good performance in the real estate portfolio last quarter and a year ago, and so that dropped off; and we had a little bit worse performance in private equity this quarter than we had previously and so that was a negative.

I would expect actually the private equity portfolio to start improving as we get out into '04.

But I think in yield, as we go through '04, I would expect it to be flat to slightly down from where we are-- where we were in '03.

Okay.

Thank you.

Yep.

Take care.

Ima Scrowsky your line is open.

Please state your company name.

Thank you, Merrill Lynch.

Good morning.

Good afternoon, I guess.

Good afternoon, Guy.

It's been busy for you, I guess.

Yeah.

Question on credit cards you referred to the fact that you had somewhat better credit experience as you applied your credit capabilities within the Sears portfolio.

I'm looking at operating expense ratios and basically seeing that for the quarter as a whole having integrated that portfolio, it looked like you had a pretty good outcome in terms of your operating expenses not being much higher on a percent of assets basis than they had about.

And the same really true on the credit side.

Should we be looking at these types of ratios when we apply the numbers that we saw this quarter to the average assets under management as kind of the run rate for next year.

Let me talk about credit first.

I think in terms of credit we said that we felt on kind of a normalized basis, you ought to see the private label credit to be more in the sort of 9 to 10% range, and so I expect as we go through '04, you will see it beginning to move up there again.

We had the benefit on the credit line of only taking the good parts, if you will, of the Home Depot portfolio.

So you will see that credit losses normalized over time.

And how about in terms of operating expenses?

In terms of operating expenses, I would expect that -- and I would hope that expenses actually begin to move down from what you saw here.

As a ratio to assets?

Yep.

Okay.

That's helpful.

You talk a little bit throughout the presentation about some of the investments that you have been making in a number of businesses, which obviously have created this negative operating leverage that we saw in a lot of businesses this year.

Do you think you can give us a little bit more color on what some of those have been business by business?

I'm looking for example at international cards.

Obviously, there was a very large increase in expenses relative to a year ago and some of that is, you know, blamed on Diner's, but, you know, how much of that is one time, versus run rate expenses.

Well, there's a couple of things in international cards.

I don't know if we have time to do business by business, and I will touch on a few of them and if you have some other ones that you want me to talk about I can.

In international cards you mentioned, a couple of things going on there.

First, we had the Diner's acquisition integration in Europe and so that increased expenses.

I would say more importantly, what we're trying to do is to take the global expertise we have in credit cards and apply that around the world and we've talked about the fact that, you know, historically if there was income pressure in any one region, the easiest thing to cut is marketing for credit cards.

So we took another look at that.

We found out that we thought we were, you know, really underinvesting in marketing of credit cards in a lot of places around the world.

And so a significant amount of that increase had to do with increased marketing expenses to drive further growth in credit cards around the world and I think that's a terrific investment to make.

So we should see faster growth than what we've seen in the past for international credit cards.

We also, you know, during the year in the domestic credit cards we spent a fair amount of money preparing for the Home Depot portfolio, preparing for bringing Sears on and so, you know, that as well as increasing the marketing for credit cards in the U.S.

So that also increases the expense ratio.

And a lot of those are investments where you make the investment first and then you get the revenue later on.

And so you should see that translate into good revenue growth going forward and have a more normalized revenue growth to expense growth kind of ratio.

The transaction services, another example where, you know, we recently won some very nice contracts there.

You know he we don't have the revenue yet.

We don't have the contract clause.

We haven't moved the assets over yet, but we have to spend a fair amount of money getting the systems ready and preparing for that.

Same thing with when we buy Forum Financial, we have to bring that in and integrate that well and that causes some expense growth as well.

We also, you know, during the year, spent a fair amount of money repositioning some of the businesses.

We talked internationally about repositioning what we did in Latin America, and so that cost us some expense.

We've had to reposition the business in Japan.

So that cost us a fair amount of expense and severance.

So those are additional things that cost us some money.

That's helpful, thanks.

One final question just on GCIB.

We're looking at the non-comp ratio here being up to 25% which is not a number I recall seeing for that business ex something extraordinary.

What really happened there?

Is that more investment spending?

Some of that is investment spending and so it's real dollars and real investment.

They were making the business.

We talked about the fact that we are spending money on technology in the equities trading execution business and so that's a piece of it.

There -- we're also spending money in technology on equity derivatives to be able to do that business well.

So there's investment going on there in the business which is part of it.

That's real dollars.

In addition, there was a reclassification, if you will, of technology people who previously would have been in comp and benefits that we transferred internally to a -- to the corporate group, if you will.

And so it came out of comp and benefits and increased the non-comp ratio.

So that's just a -- you know, a line swing.

And the 25% of it, and the high number is a combination of those two things.

Okay.

That's great.

Thanks.

Just one more little thing here on the coincident managed ncl rate on the bank card business.

I see it went up from 5.75% to 6.17% from the third quarter to the fourth.

With you attribute that all to the bank card portfolio of Sears.

Yes, I would.

Okay.

Great.

Thanks.

Thank you, Guy.

Henry McVey your line is open.

Please state your company name.

Hi, it's Henry McVey with Morgan Stanley.

Henry, congratulations.

Thanks.

Thanks.

You won't make any investment calls on this call, are you?

I will try not to.

Just a couple of quickies.

One was the balance sheet, it looked like your trading assets were up 49% year over year, but tangible equity was down.

Yeah, trading assets were up.

We had some specific actually trades we were doing for customers that drove the largest piece of that.

In addition, we -- the trading book overall was up.

How do you -- I mean -- mostly --

It's mostly in fixed income.

We also had some derivative revaluations that drove some of that.

I would say in general, and this is something that I'll be looking at in the first quarter; but I would say in general, a ratio of trading assets to the size of our business is pretty light.

But $40 billion jump and then on the tangible equity, despite all the -- I mean is that something it looked like tangible book value is down again.

Well, you know, we acquired Sears and with sears we got about $5 billion of intangibles.

But you don't run the business thinking it's measured on the tangible?

No.

Just a couple of other quickies.

One was just overall currency impact for the quarter on earnings?

It looked like if you looked at Japan and Europe you got a little bit of a kick there.

Yeah, not much during this quarter.

Mm-hmm.

And, actually one of the things we did during the quarter -- you know, we tend to be somewhat hedged at all times and we make some decisions about how we want to hedge that, but we went into the quarter with some hedges in place and we actually took some off during the quarter.

So, you know, if anything it was a slight negative during the quarter.

A slight negative.

Overall, yeah.

And just on the businesses, when you give your outlook --.

Which should result in positive for next year.

Yeah.

Just on the outlook you said the retail bank you needed to focus on investment product sales and that's something we heard from Marge.

But when I was going through the segment reporting it looked like investment product sales were actually down sequentially and have been flat since '02 and then you look at the PFS loans and they were actually down.

I'm just trying to quantify how you feel confident with the upbeat forecast.

The PFS loans are down and the investment sales in PFS are actually up.

You see that sales force adjust pretty quickly as interest rates moved up during the quarter their volumes dropped off pretty quickly in loan sales.

If interest rates come down again, those will pick up again.

What about the Citibank North America.

Citibank North America investment sales were down a bit and frankly, it's taking us longer to get the type of investment sales that we would want.

Right.

Out of the GSB acquisition.

They're up substantially from what Golden State did on its own, but not to the level we would like to see.

Outside the U.S. investment sales are going gang busters.

And two other quickies.

One was on transaction --

Henry there's more work to be done on that.

I think we can do better than what we saw or for this quarter and I think the business is committed to doing better than that.

Just on transaction services if you look at liability balances up 21%, if you look at the assets under custody up 24%, but the revenues were actually flat.

So is this -- are you sure you want to be redeploying a lot more resources and attention into something, there has to be interest rate pressure or pricing pressure.

How do you think about that?

Well, I think there's both.

There's certainly interest rate pressure.

Liability balances are coming in and then you are able to utilize those at pretty low interest rates in today's interest rate environment, but that's not going to be something that's going to exist forever.

Interest rates are going to go up and so we think it's a huge benefit to be able to build the balances there.

But in the meantime, you face -- you face that kind of a pricing headwind on the interest rate side; and I think on the assets under custody, you've had some of the same issues where there's some pricing pressure in that business.

I think for us, it's still a high return business.

It's one where we have some unique advantages.

I think we have a lot of room to grow that, and I think you will see the revenue come into that business as you get out into '04.

Okay and just final question is on the cards.

I think at the time of Sears we had -- I thought it was $64 million accounts and then it looked like sequentially your accounts were only up around $32.5 million.

That was the first question, and then second is if it goes to 9 to 10% chargeoffs, then that's 100 to 200 per quarter but you didn't really give us a guidance on how that will season.

Is that a first quarter or second quarter or third quarter event?

How does that work out?

I think I will answer the second question first, which is I think you will see it move up relatively steadily during the year and by the time we get to the fourth quarter it should be in the 9 to 10% range.

Okay.

And in terms of the accounts those were inactive accounts that we purged.

Okay.

Good.

Thanks for your help.

Thank you, Henry.

Once again congratulations.

Thanks.

Glenn Schorr your line is up.

Please state your company name.

Thanks, UBS.

Hey Todd.

Hi, Glenn.

In M&A, the $140ish million pickup, is that all true advisory fees, or is there--could you give a split between syndicated lending because I know there was a pretty good pickup in the quarter.

Are you talking about the --

Sorry inside GCI base.

Yes.

The advisory and other fees.

Just even if it's, you know, color of the $140 million sequential pickup, how much is advisory versus syndicated lending.

Yeah that's not a breakout that we typically do.

No problem.

We can move on.

How about a comment on just pipelines in general between M&A --

I would say in general completed M&A, I think we were number two in the quarter.

So we had, you know he, decent performance in M&A fees during the fourth.

All right, second question.

Pipelines in general for both the investment banking and M&A categories.

Pipelines are up from a year ago.

Year ago's pipelines ended up -- a lot of it ended up not materializing and so when you were on calls a year ago with a lot of the brokers, everyone sort of felt reasonably good about their pipelines; but some of it fell off during the year.

I think people feel much better about the quality of the pipeline at this point.

I would say it's not only up, but it's a better quality.

Understood.

Your commentary on asset management outlook for single digits.

My gut is if the equity markets had a normal year and your flows continued, the operating leverage in that business can easily produce well into the double digit earnings growth.

So I want to get at the conservatism.

Is it revenue or expense driven?

Meaning is there pricing pressure on the outlook, or do you feel that there are certain expenses borne by the asset management business that used to be paid in commissions that might be paid in cash?

I'm just trying get my arms around it.

I think there are a lot of unknowns on exactly how that industry structure is going to play out.

There's questions on the fee side.

There's questions on the -- there's certainly more expenses on the cost side.

Just the -- on the legal and compliance dollars that we're paying right now are substantial to make sure that you know, everything is buttoned up very well in the business.

And so, you know, I think that's going to continue.

It seems as though it will continue throughout 2004.

So I expect expenses to be up, for nothing else, because of that.

And then on the revenue side, there continues to be a reduction in costs on institutional money, and then the question is: What is exactly going to happen on the retail side?

I think it's still up in the air.

I think there's enough uncertainty about the business to not make a double digit call for it, for 2004.

Fair enough.

Fair enough.

Maybe last question, on the operating leverage side --.

Really hate being wrong on these things. [ LAUGHTER ] Maybe I'm being too conservative.

That one maybe.

On the operating leverage side you spoke about the continuing headwinds in '04 and put some numbers around it.

In your 2003 investments, the $650 million increase over '02, clearly there are some there that hopefully don't happen like repositioning, restructuring, maybe even some front end expansion and product development.

Is it possible that that bucket of expenses is down year over year or is that wishful thinking?

I think -- it may be down a bit and -- but I think if we see a 2004, like we expect right now, which is where we're seeing good momentum, good customer momentum and decent environment, economic environment around the world, I think you will see much less repositioning expenses; but you may see more on the front end and even more in the marketing.

But I would say overall, it should be down.

The year on year increase should be down a bit.

The year over year increase, meaning less than $650 million?

Yes.

Okay.

Got you.

Okay.

Thanks very much.

Thank you.

Andy Collins your line is open.

Please state your company name.

Yes, Piper Jaffray.

Good afternoon.

Just quickly kind of I don't want to beat a dead horse, but on the global card business, if the way I do my math is correct and, you know, your revenues were up a ton here in the fourth quarter, and I was just wondering if you back out the Sears card whether or not those dynamics will kind of continue into the fourth quarter.

Well, there's always a seasonal dropoff in the cards business from the fourth quarter to the first quarter.

So you always see-- the fourth quarter is always the strongest quarter of the year.

And so I would expect to see a dropoff in income from the fourth to the first.

But an improvement from first of '04 over first of '03.

Okay.

I think the business is actually doing extremely well.

The profitability characteristics are spectacular on the bank card side.

As we talked about, we tried to move away from this balcon game, more to a different type of value proposition around safety and that seems to be going pretty well at this point.

So we could expect perhaps the margins to at least maintain, if not get a little bit better?

I think at least maintain, yeah.

Okay.

And kind of one other question.

You touched a lot on the lines of business for '04.

I was wondering if you could talk a little bit about share count because there was a pickup in the fourth quarter and you kind of slowed down on your repurchase program.

Yeah, I mean share count is something that, at least on a diluted basis, has to do with where the stock heads.

If the stock heads up relatively quickly then you tend to have a little bit more dilution of the shares.

I would expect that we would continue on a repurchase program during '04.

And that will soak up some of that dilution.

And finally on credit, any kind of overview or overarching comment on credit.

The only thing, as you know, probably everybody on the call knows, you know, we have changed some of our philosophy on how to return capital to shareholders moving a little bit away from share repurchases and a lot towards increased dividends.

Now up more than 100% from where we were a year ago.

You had another question?

And just the credit, kind of any overarching comments on credit?

You did mention just on private label but you didn't talk really overall credit.

Overall credit for consumer you mean?

Consumer and corporate, if you could.

Overall credit looks very good.

The consumer looks benign.

You know, I wouldn't say it's going to improve substantially from here unless the economy and employment picks up a lot; but it doesn't look like it will get worse any time soon.

It looks very -- I call it sort of flatish, certainly for the next six months or so and then we'll see how the delinquencies look then.

On the corporate side, I would expect that probably corporate credit costs next year will be no higher than, and probably lower than, what we saw this year.

Great.

Thank you.

Thank you, Andy.

Jon Balkind, your line is open.

State your company name.

Fox-Pitt Kelton.

Hi, Jon.

You mentioned the tax rate.

Just wondering how it flowed through the business lines.

It looked like the global retail bank was down meaningfully.

Is that just international exposure there or is there something else going on?

And then a second question will be on the consumer finance business.

The retail banking is a combination of the international tax planning, as well as some of the state and local settlements had to do with the retail banks.

So --

Okay and then second you continue to reduce head count and branches in Japan.

Are you guys pretty much done with that process or will we continue to see you shrink the organization over there.

We feel like we've got it pretty much set now.

That's not to say there might be some, you know, additional branch closings at some point but I think we're, you know, 80 to 90% done with what we needed to do in terms of taking out head count and what we needed to do in terms of reducing the number of branches.

Great.

Thanks, Todd.

Thank you.

Take care.

Our final question comes from Mike Mayo.

Please state your company name.

Prudential equity group.

Hi, Mike.

Hey, Todd.

Can you just give a quick thumbnail sketch by region?

You did it by product area, but where do you expect the strongest growth by region?

You mentioned Asia.

And then separately what are your priorities for acquisitions in 2004?

Thanks.

Yeah, on the regions I think Asia, very excited about it.

I think we'll see some nice growth out of Asia.

In Japan, I would hope to see, you know, at a minimum stabilization out of Japan and hopefully some growth out of Japan but I'm not counting on it being a big bounce back from this year.

In Europe, we'll get the benefit of -- hopefully of next year not having another massive fraud, so that should help us out, plus I think the consumer business looks good.

Good growth in the consumer business and we'll have some higher credit losses but the growth will be good and the corporate businesses really had some very nice momentum out there in Europe, gaining share in a lot of areas and so we expect that to continue to have some decent momentum.

And then Latin America, I think we'll -- we've got the businesses structured the way they need to be.

And it looks like, you know, the main issue there is Brazil and that should have decent growth.

Mexico should have okay growth next year, I think.

We've seen interest rates come down a lot in Mexico.

So they have to face that headwind, but the business is extremely well positioned and extremely well run; and so I think it will have sort of decent growth.

And then the U.S. should be fine.

And with regard to acquisitions, I mean since your last quarterly earnings conference call you had Bank America, Fleet, and now JP Morgan- Bank One, what is your preference to gather U.S. deposits?

Is that still a priority and what are your other acquisition priorities.

I think we still have a focus on building the retail system in the U.S.

There's obviously lots of targets out there.

Lots of, you know, anything from a small to medium-sized and maybe even slightly larger things that might be interested in being part of Citigroup.

So we continue to look for those and I would expect that we'll continue to make acquisitions in retail banking in the U.S.

That's certainly a priority.

I would also say we're actively looking in the other parts of the world that look like they've got good growth characteristics.

Asia would be an example where we're looking for things there.

And I feel like I'm kind of like a broken record here, but, you know, almost anything that we think is sensible in consumer finance or cards we would take a very close look at.

Anything that we thought was reasonably priced in the wealth management area we'd certainly take a close look at.

Anything in transaction services that we thought really added to our capability there and was somewhat reasonably priced, we'd take a close look at that.

And then we would, you know, continue to try to figure out a way in Europe to build our consumer finance franchises there, so we'd, you know, look around there.

I think we can do better in Europe.

Our main competitor, I would say in the consumer finance area in Europe has been G Capital.

They have made a number of acquisitions and I think we can probably find some more over there to do.

Thank you.

Thank you, Mike.

Take care.

That was our final question.

Thank you, everybody for joining us.

And if we didn't get to your question, we apologize.

We're out of time, but please feel free to give us a call this afternoon.

Thank you.