花旗銀行 (C) 0 Q0 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Citigroup's first quarter 2004 earnings review, featuring Citigroup's CEO, 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.

Miss Ptashek, thank you, you may begin.

Thank you, good morning, everyone and thanks for joining us to talk through our first quarter 2004 earnings results.

We have Chuck Prince with us and Todd Thomson.

Chuck will begin with some remarks and then Todd will take us through the presentation and after that, they will both be happy to respond to your questions.

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

Thank you, Sheri and good morning, everybody and thank you for joining the call this morning.

We're very pleased to have our earnings out, we're very proud of them.

It's yet another record quarter of earnings for Citigroup.

This is our fifth in a row of record earnings.

And I'd like to emphasize four points before Todd takes you through the specifics.

The first, obviously, on our earnings is the breadth and diversification of the results.

We've had double-digit income growth in all nine businesses and regions and record earnings in six of our nine businesses.

And I'd like to especially signal out our international business, up 32% in earnings, all organic.

And just to note for you, things like Amia consumer being up 37%, Asia Pacific consumer up 33% and Asia Pacific corporate up 68% and we're very proud of the way the international people are performing these days.

The second area I'd like to highlight for you is revenues.

Revenues.

That's something that's been a big focus for us and we'd like to highlight that.

Positive operating leverage, something we talked about last year, coming back this year.

We've done what we said we were going to do.

I'd also like to point out that that positive operating leverage reflects continued investment spending.

We are increasing our investment spending both on the marketing side and on technology as we build for the businesses going forward.

It's also, our revenue reflects great diversification, it's across all of our business lines.

I think this is our sixth quarter in a row of bottom line increasing revenues and again, I'd like to highlight international up 18%, all organic and I'd especially like to say a nice thing about our equities business.

I've been tough on our people and I think that Jamie Farese and the team are really doing a good job at moving the equities business in the right direction.

Marilyn Clark, are you listening?

I think that in terms of revenues, you should think about us as having additional room to grow.

Our revenues were up 16%, but some parts of the business, the revenues are not up as much as we would like and as we would expect.

And so I think we have further room to grow on the revenues side and I'd point you especially in that regard to the customer balances chart that Todd has in the presentation that he'll go through, as well.

The third point I'll mention is our new risk capital model, which has been highlighted in an earlier call and which we think gives us much better tools for managing the business and allocating our capital going forward as well as the additional GCIB disclosure.

And the fourth point is our KorAm acquisition, which we're in the process for the tender for and as everybody knows, the expansion of international and the expansion in Asia is a particular focus for me, personally.

So, I'm very optimistic about the Company and its results.

We're sort of playing the game plan that we have and not trying to swing for the fences and I think the results are showing.

And I'm very pleased with results and very proud of what our people have done.

So, with that brief introduction, Todd, why don't you take us through the numbers?

Thank you, Chuck.

Also, I do want to mention that Sheri is now seven weeks from her new baby and we are taking suggestions on names.

She's already gotten the suggestion of Chuck. [ Laughter ] As well as Sandy.

So, you can vote for one of those or send any additional names you have in mind.

She doesn't know whether she's having a girl or a boy so she takes both.

If it's a girl, I would vote against Chuck, just as a matter of style!

All right.

Let me just mention the backdrop for these numbers.

I think from our perspective, from what we see around the world, the U.S. recovery seems to be really taking hold.

We expect continued strong GDP growth.

Clearly employment is rebounding, the retail sales look strong.

You know, we have 20% of the bank cards [inaudible] out bank cards and we're seeing sales per active account up 16% this quarter.

Now, part of that is us probably taking share from others, but part of that is just the continued robustness of the consumer part of the economy.

I think that bodes well for the future.

Obviously the March ISM non-manufacturing reported a record high [inaudible] manufacturing sector through March for the 10th consecutive month.

CEO confidence is at the highest level in two decades.

Consumer confidence looks like it's up pretty strongly and the markets look strong [inaudible] of net flows in equity funds in the first quarter, versus an average of about $24 billion for the past five years.

So, a lot of momentum there.

Debt and equity underwriting up 14% from last year and 26% from last quarter.

And that includes equity underwriting up 200%, a little bit of signs of life in M&A.

We've seen some early signs that the deflation scare is now passed.

It's not clear that we're heading into inflation yet, but clearly the deflation scare seems to be passing.

Asia is going very well from what we see out there.

China is clearly booming.

It's dragging Korea, Southeast Asia and Japan with it.

Latin America is stabilized, the U.K. looks very strong.

The euro zone is really the only part of the world other than the Middle East, which is sort of bumping along.

Germany continues to be a bit weak.

Credit looks terrific.

Consumer credit looks stable to improving in just about every market we operate in.

And corporate credit continues to improve markedly.

So, it's a positive environment for us, for our businesses and you see that reflected in our results.

It's really -- if you will, a quarter of records.

Record revenues up 16%, record earnings up 29%, it's the fifth consecutive quarter we've had record earnings.

Double-digit growth in every one of our nine global businesses in each one of our six regions and six of our nine businesses posted record earnings this quarter.

Strong returns continue.

ROE of over 21% and returns on our risk capital of 45%.

So, this growth that we're having in revenues and earnings is high quality growth.

It's high return kind of growth.

Strong strategic momentum.

We announced the acquisition of the Korean American Bank, we closed Washington Mutual Finance.

We announced the China credit card JV.

So, strong strategic performance and we have the form [inaudible] from our risk capital approach and for this quarter, you'll see that we present those numbers to you in the quarter.

Increased our quarterly dividend by 14% so, a very strong financial performance and I think continued good strategic moves to position for future growth.

Let's go to the P&L for the quarter. [inaudible] which is page 4 in your deck for those of you following along at home or on your PC.

If you look at the major income statement items, revenue of $21.5 billion, up 16%.

We had net interest revenue up 17% and fee revenue up 22%.

Expenses were up 11, so a good, positive operating leverage between our revenue and expenses and that's despite continued investment in marketing in overseas branches and continued expense headwinds we're seeing from options and pension costs and increased legal costs.

Credit, I mentioned, improving on the corporate side and nice and stable on the consumer side.

Pretax income up 28% and our pretax margin improved to 36%.

So, continued to improve the margins in the business.

Our effective tax rate came in at about 31%, which is slightly lower than a year ago and would say higher than most of our global competitors.

Our segment performance on the next page, strong across the board.

Each of our segments was up more than 20% with strong revenue growth, as well.

So, Global Consumer segment saw 18% revenue growth and 21% income growth.

The GCIB saw 8% revenue growth.

Private Client Services doubled their income from a year ago, just about, up 55%.

And 30% revenue growth so very strong rebound for the retail brokerage business.

Terrific performance.

Investment management, revenue growth of 19%.

So, very good momentum across each of the three businesses there.

Now, international grew 32% in income, 18% revenue growth and so international is becoming a larger part of the whole.

Asia's now 12% of our total income.

I'll talk about Asia in a little while, but really strong performance out of both the corporate and consumer side in Asia.

And consumer is now about 50% of the overall high for Citigroup as we've seen stronger growth out of both investment management, private client and Investment Banking.

And consumer.

So, good leverage we're seeing out of our other businesses.

As far as investment activities, you can see on the page there, $26 million for the quarter, not a particularly strong performance.

We had some valuation up and downs but really no major positive income events during the quarter.

We do expect to do a bit better than this in the coming quarters.

And in corporate other you can see came in at positive income during the quarter.

In the corporate other line includes the $180 million after tax gain on the sale of EFS, which closed in January.

And we're continuing to see benefits of unusually low interest rates in the economy.

During the quarter, as interest rates continued to decline, we began to position ourselves for interest rates to rise in the medium and long-term.

So, from my perspective, having a robust economy, having GDP growth in the U.S. and around the world with the volumes and the credit performance that that implies, will more than offset our risk to rates rising as I look out two to three years and as I look out beyond two years, it should be a strong positive for our business.

Now, the next chart, page 6 is actually my favorite chart.

Every one of our global products and every one of our regions grew their income double-digit from the previous year and the lowest number on the page is actually consumer finance at 13% growth.

So, a very, very strong performance, very broad based across every product and every region.

Again, record earnings in six of the nine businesses.

I'm going to talk about the businesses and the products in detail in a little while, but let me just touch on a couple of regions.

As you can see, Asia, up 49% from the prior year.

That's a record income in Asia.

And what you're seeing there is the benefit of I think a very strong position we have in Asia, the kind of investment we've been making in the past 18 months to grow the business.

And that's helping us on the consumer side and the corporate side as well as the investment management side.

Latin America, you're seeing 36% growth, that's primarily improvement in credit.

So, you're not seeing a lot of the strong revenue growth out of Latin America in general, but it will bounce back and a stabilization of those economies, which is improving the credit situation down there.

And Japan at 14% growth, continues to be affected by our consumer finance business.

It had declined in the consumer finance business year-on-year, but an improvement from the fourth quarter, so, we have seen stabilization in Japan in that consumer finance business and the rest of the businesses in Japan are performing very strongly.

So, overall 14% growth there.

Chuck had mentioned customer balances.

We talked about this last quarter and how we'd done during the year across customer balances.

I just want to highlight that again here.

We're very focused on growing our customer balances, both organically and on occasion through acquisition.

Especially in this part of the economic recovery.

We continue to make those investments.

You can see transaction services, assets under custody growth, which reflects the benefits of a very focused, dedicated corporate calling effort that we implemented about a year ago.

We're seeing some tangible benefits of that and some very nice wins in that business.

Cards growth is the private label acquisitions as well as very strong organic asset growth, receivables growth in the international cards business.

The private client assets, very strong growth, up 23%.

And corporate loans, at the bottom of the page there, you can see is still not growing.

And again, that's an area where we don't actually focus on growing that part of our business.

That's a part of our business that we do for our customers, we think it's an important part of our business, but it's not a particularly high return part of our business.

So that's not part of our growth strategy, if you will.

Retail banking deposits up 7%.

That overall number doesn't look that strong.

I just want to get into that a little bit.

The international deposits are up 18%.

Again, all organic growth, with Asia up 16%, Europe up 30%.

So, internationally, very strong performance.

In the U.S, the core deposits in the branches actually grew 11%.

We had checking accounts growing at 21%.

And we had some, if you will, managed falloff of high cost CDs that reduced the overall growth rate of deposits, but we were pleased with the underlying growth at the customer business in retail banking.

The next page shows our returns in risk capital and invested capital turns for the quarter.

Every one of our businesses improved their return on risk capital during the quarter with the exception of the cards business and cards business declined from 82% to 71% due to the increased risk capital from having Sears in for a full quarter.

But again, that's obviously very strong returns.

And so that's an area where we said turns are quite high and we can go about growing this business faster and have slightly lower returns, but still very positive returns.

And again, every one of our businesses, with the exception of propriety investment activities, strongly above our cost of [inaudible] so very high quality growth in revenues and earnings during the quarter.

We announced moving now to page 9, we announced on February 23rd the acquisition, the tender for the shares of the Great American Bank.

That's a leading local bank that we're very excited about bringing into the Citigroup umbrella.

When you combine what we have in Korea with Coriam, you get about 5% of the retail banking share and about 6% of the corporate banking share.

We think that Korea is a very attractive place for us to be more significant.

A fast-growing economy.

It is the second largest economy in Asia, outside of Japan.

And clearly, sort of to set up the plate for our efforts in building our business in Asia, we expect the tender offer to close at the end of the month and in typical Citigroup fashion, I would say not only is it strategically important, but I we expect it to be accretive to our earnings during this calendar year.

Let me give you an update on the other two acquisitions that we recently completed on page 10.

We closed in January the Washington Mutual Finance deal and again, accretive immediately and exceeding our earnings projections.

But it's an important acquisition for us, not just financially, but also strategically, it expands our U.S. footprint in the consumer finance business.

We're entering 65 new markets from this acquisition and the consolidation is well underway, signage and branch consolidation is just about complete, systems integration is moving along quickly and as I said, so far, exceeding our projections.

So, all signs are quite positive on the Washington Mutual Finance acquisition and integration.

A quick update on Sears.

Continues to exceed our projections for customer additions and credit quality and income contribution is now fully integrated into our cards business.

So, all signs of very positive on that acquisition and we expect that to be even more positive to earnings than we had anticipated when we originally did the deal.

Let me move now to some of the individual businesses.

On page 11, our three consumer businesses, cards, consumer finance and retail banking.

Cards, obviously, very strong income performance for both North American and international.

International was all organic growth, up almost 50% with very strong performance in growth in Hong Kong and Turkey and a number of places internationally around the world.

In North America, a lot of the increase in income was due to the Sears acquisition and the Home Depot acquisition.

Again, performing very well.

And as we talked about last quarter, you know, in cards we're really transitioning our growth strategy from what had been, I would call it sort of the industry strategy of advertising for balance transfers or balcons as they're called in the industry.

And we're transitioning from that strategy because we found that to be becoming a low return strategy, to a strategy really focused on marketing and supporting identity theft protection.

You may have seen some of our TV ads or print ads.

And I think that's going very effectively.

Our customer acquisition rates are up 30%.

The usage of our card we think is up is up competitively because of that ad program.

But at the same time, we're running down those old, low return balcons.

So those are down 22% from a year ago.

So, you will see that transition happen in our managed receivables for the bank card business as these low return things run off.

And it takes a little bit of time to add to the higher return more stable business that we're looking to grow.

Consumer finance, nice rebound in the North American business, you can see up 31% in income terms, average loans are up, beginning to see some nice momentum in that business.

And international is really the continued story of Japan.

Again, that's stabilized now, it's still down from a year ago, but up fairly nicely from last quarter in income terms, we're seeing credit quality stabilize, credit losses declining a bit in Japan.

Bankruptcies are down, economy's beginning to improve, as well.

So, we are optimistic that we will see continued better performance out of the Japanese business.

In retail banking, record quarterly earnings for that business, beginning to see some good customer momentum there in North America.

Let me highlight the investment sales piece because, you know, this is something that we've really focused on both in the U.S. as well as internationally to expand the relationship we have with customers in retail banking and be able to offer them more than just checking and deposit-taking abilities, but be able to serve as their financial advisor, as well and provide investment products to them.

Our investment sales in North America are up 42% from a year ago.

So, very strong performance and internationally up 79%.

So, extremely strong investment sales performance for all of our retail banking and that's helping to drive the income performance.

In addition, we're focused on continuing to have more customers in each of our branches in North America.

Consumer checking accounts grew 21% during the quarter.

And money market new accounts increased 15%.

Consumer loan applications increased 32%.

So, we're seeing very strong customer business at the branch level in retail banking in North America, as well.

And obviously the international performance is just spectacular, up 36% in income and continuing to drive deposit growth, investment sales growth, loan growth and building branches in places around the world.

So, that's very good.

Let me move to the Global Corporate Investment Bank.

We will start with capital markets in banking.

And I would characterize our performance there as solid.

Not spectacular.

On the one hand, record revenues, up 8% and record earnings up 23%.

So, from an earnings perspective, that's a very strong record for us, almost a billion and a half in net income for the quarter.

The 10th consecutive quarter we were number one in global debt and equity underwriting.

We've seen continued improvement in credit and capital markets in banking and that's one of the ways that we are actually are leveraged to this global recovery.

We're beginning to see some good momentum in equities, both underwriting and trading, Chuck mentioned that, nice job for Jim Farese and his team.

We saw strong cash and derivatives performance this quarter.

Equities markets revenue was up 45%.

Equities underwriting revenues were up 97%.

And we're seeing a significant increase in the IPO backlog.

We also had good results in distressed debt trading and mortgage trading where we increased our high yield market share and kept expenses in line.

So that was all, I think very positive for the quarter.

I would say on the less positive side, our fixed income underwriting, although still clearly the number one franchise on the Street, saw more of a falloff in revenues from last year and last quarter than we would like and I'd characterize our fixed income trading as only an okay performance this quarter.

Emerging markets volatility dropped off from a year ago, so that hurt our trading results a bit in emerging markets versus last year.

And I would say we were a little early in positioning for the rise in interest rates.

But, you know, as you know, our fixed income trading business tends to be more stable than most of our competitors and you can see that in our results over the past quarters.

So, I would say even with the record earnings in this business, we still have more work to do and we continue to build out our derivatives business, continue to build out our hedge fund capabilities and our M&A business and I'm very encouraged by the momentum we're starting to see.

The backlogs look quite strong.

You can see in our attachment to the press release and I've laid it out here also on the presentation, our enhanced disclosure for capital markets and banking.

And what we've done is we're breaking out, for the first time, the lending revenues line so you will be able to see that.

And we've made a number of other adjustments to try to be as comparable as possible with others across the Street, although there's not entire comparability because not everybody does exactly the same things, but I think this is as comparable as we can get and we've tried to be as clear as possible about what's going on in the underlying business.

Transaction services.

Very strong growth in customer balance and liability balances, up 21% and assets under custody increased 27%, so, you're seeing very strong growth in the underlying customer business and that's being offset to a great degree by spread compression from the low interest rate environment.

So, that's something that we're just going to have to continue to deal with and as rates begin to turn, we ought to see a significant revenue lift in this business.

And again, a record quarter for transaction services.

On page 15, again, good performance across our ranks and market shares.

It's the tenth consecutive quarter, again, number one in global debt and equity underwriting.

But we continue to invest to improve a number of areas.

As I mentioned before, the equities platform, the fixed income business and derivatives and restructuring distressed debt and, you know, we've been hanging around sort of number five, number six, number four in M&A for a while and frankly that's just not good enough.

We know that and we're focused on trying to improve our rankings in M&A.

Top line service, I'm on page 16 now.

I don't know what, not much you can say.

Fabulous performance, again, up 55% from a year ago.

That's the highest income quarter we've had since way back in the year 2000.

Pretax profit margins at industry-leading 24%.

Revenues up 30%, net flows continued strongly positive at $6 billion.

And you can see our client assets are now over a trillion.

Up 23% from a year ago.

So, very strong performance along every measure in our private client brokerage business.

Investment management segment.

Life insurance, private bank and asset management businesses, really strong performance all across the segment.

Nice performance in life insurance and annuities.

Record earnings for them.

Net revenues, which is the gross revenues minus policy [inaudible] and claims is up 32%, so strong underlying growth in the business.

The business volume growth continues to be quite strong.

Our business volumes are up 26% from a year ago.

And the Japan variable annuity sales continues to be a very strong story, $1.4 billion of Japan annuity sales during the quarter, which is another record for that business.

Very strong momentum out of that.

Private bank.

Eleventh consecutive quarter of record earnings, continue a very nice streak of building that business organically.

That revenue is up 25% from a year ago and business volumes now over $200 billion.

Asset management also record earnings for the quarter, good revenues.

Actually pretty good net flows.

The overall net flows weren't as high as we might have liked, but the retail flows and the long-term [accutional] flows were quite strong and that offset by some reduction in liquidity flows which tend to be much lower margin businesses.

So, the underlying flows were actually quite positive.

Assets under management now, up to $530 billion.

All right, that's about the businesses.

Let me spend a little bit of time on credit.

Consumer credit first on page 18.

And what you see there is what I said earlier, which is strong performance in consumer.

Actually slightly improving on credit losses in consumer finance and retail banking and a seasonal slight tickup in net credit losses in the cards business.

And then if you look on the right-hand side of that page in delinquencies 90 days past due, every one of our businesses, again, adjusting for the acquisition of Sears and Home Depot, every one of our businesses shows improved delinquencies.

So, that bodes well for future credit losses.

On the corporate side, the story is even better.

Corporate credit costs continue to improve.

As you can see, the cash basis loans has come down from the second quarter of '03 which was the peak of $4.2 billion down to this quarter, $2.9 billion.

So, a nice, significant and relatively rapid drop in cash basis loans.

The troubled industries that we talked about in the past 18 months, telecom, power and Argentina, have stabilized significantly.

A number of debt restructurings have happened and our non-performing loans in those three areas, telecom, power and Argentina, are down 45% from last year.

So, we feel very good about how credit looks going forward.

We're not seeing any large numbers of new distress situations.

We did, during the quarter, release $150 million from our corporate credit reserves as a result of this improving environment and if the trends continue, you will probably see some further releases going forward.

And as I said, at this point things look quite good on the corporate credit side.

Operating leverage on page 21, something as you know we've been focused about, we talk about it every quarter.

We had some issues last year where we didn't do as well as we would have liked to have done in revenue growth versus expense growth.

But very strong performance this quarter, 60% revenue growth versus 11% expense growth and again, that includes continued investments in advertising, marketing, building branches, especially in consumer finance and Asia, spending money in technology and equities business and the fixed income business.

Continued [inaudible] expansions and it includes continuing to absorb expense headwinds that we face.

We had just through stock options expense and increased pension expense and increased legal expense, alone, $270 million increase our expenses this year versus last year.

So, we're able to overcome these types of expense headwinds, make the investments and still have positive operating leverage.

Capital discipline.

Obviously we introduced our risk capital approach this quarter.

Our stockholders equity and trust preferred is up to $108 billion.

Our stockholders equity is up to about $102 billion.

Like the acquisition of Washington Mutual and despite continuing to repurchase shares and increase our dividends, increased our Tier One ratio during the quarter from 8.7% from the first quarter of last year to about 9%.

Total capital ratio also up to 12.3%.

[inaudible] and gap assets and continued to drive despite what I think is a very significant amount of equity in the balance sheet...

Very strong returns at over 21% return on equity.

And I do want to highlight on page 22 that we continue to focus on returning capital to shareholders.

Last year we did it mostly through stock repurchases and this quarter we're doing it mostly through dividends.

So, we've paid out about $2.1 billion in dividends and repurchased about $500 million worth of stocks for a total of $2.6 billion return to shareholders.

The stock's currently at about a 3% yield and for those of you out there looking for someplace to put your 70 basis point return money market funds, I highly suggest our 3% yield and, of course, the option of global growth that you get with Citigroup.

All right, so a quick summary, record quarter.

It's really a quarter of records.

Record revenues and earnings, strong returns on capital.

Double-digit income growth in every business and every region.

Some strategic transactions to grow the franchise.

And very strong business momentum overall.

Customer growth continues to be quite strong.

Corporate credit is improving.

Consumer credit looks stable and we continue to focus on managing our capital very intelligently for shareholders.

Why don't we turn to questions?

Thank you.

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

Again, if you'd like to ask a question, please press star one on your touch-tone phone.

Richard Strauss, please state your company name and you may ask your question.

Thank you.

Deutsche.

Hi, Richard.

Hey, Todd.

Just, you know, you mentioned M&A that, you know, you want to definitely get that up.

Let me ask you this.

You also talked about the backlogs and you said they look strong, but you had mentioned earlier that IPOs in particular, were you also referring to your M&A backlogs going forward?

Yeah, the M&A backlog is okay going forward.

The equity backlog and fixed income backlog look pretty strong.

Uh-huh.

And in terms of, you know, where your disappointment is, is it just your prominence on these M&A deals or just, you know, your role, is it the role in the deals?

Is that why we're not seeing more on the top line here?

Well, I think in general we have said, Chuck has said specifically, he can speak for himself, and Bob Druskin I think believes that we shouldn't be number five or six in any significant area that we want to operate, whether it's Corporate Investment Bank or whether it's the retail bank.

Or whether it's the consumer banking or investment management.

So, I think we feel that that's an area that although, as you know, and as any of our analysts and investors know that cover the brokers, the amount of money that you actually deliver to shareholders on M&A is not a particularly large amount.

So, it doesn't drive that much income.

It is an important area for ongoing relationships with clients and we should be, you know, number one and number two there just like we are in fixed income and like we expect to be and typically have been in equities.

Uh-huh.

And I was kind of curious, you know, you characterized your trading results in fixed income as being okay.

It was $1.5 billion.

I think that was the best it's been in over a year and these have been pretty great conditions.

Maybe you could just clarify that?

Yes, I think on the equity market side, our trading was up fairly nicely.

We were pleased with that.

I would say on the fixed income side, although we did well, I don't want to mislead you, but I think we did well.

I think they were okay.

They didn't, we didn't get the same kind of lift that you would see across some of the other competitors and the reason for that is we tend to run a more stable business.

We also had a very nice trading result a year ago so we've got kind of a tougher comparison than others would have.

We don't have the volatility that others have seen in that line.

But as I said, I think we're a little early in the interest rate position for rates to go up and, you know, we benefit on the trading line from volatility in the emerging markets.

A year ago they were quite volatile and that helped us in revenue a year ago and right now they're relatively stable and so we don't get those benefits in the trading line when you see the stability.

Okay.

I want to add to that, Todd, if I can.

I think we ought to put this all in perspective.

We have a great fixed income business.

We have a premiere fixed income business, but it's not one where we're going to swing for the fences and you're not going to see us up 60, 70% and that's a very conscious way of running the business and so you have to put our method of conducting our business in the right perspective.

Okay.

And then finally, just, you know, looking the equity trading results, not equity markets but equity trading.

You know it was definitely up sequentially from about 60 to 200, but still at the level that it was, you know, even as recently as the second quarter of 2003 and, you know, maybe you can just, the number still seems stubbornly low and maybe you could just give us some color on that.

Well, like I said, we feel like we have a lot of momentum now in the business that Jim Frese and the team are doing a terrific job.

We talked about, in the last couple of quarters, that we felt we had some work to do in a number of areas in the equity trading business.

We needed to put some money into some technology, we needed to do a better job working with customers on the derivatives business.

We felt we needed to do a better job on working with the hedge funds as customers and that we'd, you know, frankly fallen off in some of that.

That doesn't turn in a quarter but I think we're beginning to see the right kind of momentum and as the team continues their work, I think you will see even better performance going forward.

Okay.

Great.

Thank you.

Thanks, Richard.

Thank you.

Our next question comes from Guy Moszkowski, please state your company name.

Thank you.

Merrill Lynch.

Good morning, gentlemen.

Hi, Guy.

Question for you on the, first of all on the compensation accrual in GCIB.

It was interesting that that actually, the dollars declined what, about 5%, despite the improvement in the revenue.

I was wondering if there was a mix shift that was driving that?

Are you finding that you can sort of decrease the price of the seats, so to speak, or are you taking some risk of being caught out competitively later in the year if conditions remain good?

Well, I think it's definitely not the latter.

I think we absolutely accrued to the level that we think will be sufficient.

If you looked at the accrual rate or the comp to net revenue rate for the quarter, it's about the same as what you have seen in the average of last year.

So, probably some mix issues in there.

But, you know, I think we're very comfortable that we're accruing at a rate that's sufficient for the business.

Okay.

Fair enough.

The next question would be on the comments that you made in the release and on the phone about being positioned for a higher rate environment.

It's notable that you talked about that being the case for the medium to long-term.

Could you walk through the things that you've done in order to position yourselves in that way and also comment on the near-term pros and cons of higher rates in some of the various lines of business that will be affected?

Sure.

Just simplicly what we did during the quarter and what we've been doing I would say in general for the past six month or so is reducing our gap a bit and also shortening up the duration of the gap so that as rates rise over a period of time in the sort of medium term, that turns positive for us.

And you can see in what we disclosed in our Q, we have the one year number and the five-year number.

The five-year number is positive as rates rise.

But we've shortened up much shorter than five years.

We try to position ourselves for what we have felt would be strengthening economy and what we feel will at some point will be the elimination of the overly accommodative interest rates at this point in time and that eventually beginning to see some rises in those rates beyond I would say a more natural level of short rates at, you know, 1.75 or 2%.

So, we felt this was coming and we tried to position ourselves as a company to take advantage of it.

In terms of the businesses, the ones that tend to perform better in higher interest rate environments would be two types.

One, the deposit-taking businesses and so when you're taking in deposits as a retail bank or as a transaction services cash management business, you get those deposits often, a checking account, for example, at low or very no interest or at zero interest rates and then you lend those at whatever the prevailing rates are, out to people.

So as rates rise, your cost doesn't change much, but your margin increases a lot.

So, those businesses should improve.

I think also our life insurance business, we've talked about taking essentially deposits from customers and invest that and it gives premium and the insurance value back to customers, but keeps the benefit of the returns and so if you're able to invest that at higher interest rate levels then you make more money in that business, as well so this would be the ones that are directly associated with interest rates rise.

That said, I think a couple of other things tend to happen when interest rates are rising.

Typically they're rising because the economy is strengthening and when the economy is strengthening, you see better volumes across all of our businesses and lower credit costs across each of our credit businesses.

So, the leverage to rising rates, I think, isn't just the interest rate environment, but it's the economic environment that drives the increase in rates.

And, Todd, when we see that 10-Q in a few weeks regarding the one-year and the five-year outlook for if rates change by a certain amount, should we expect to see that you've changed anything very dramatically this past quarter?

Yeah, you'll see the gap will be smaller but you can't see in those numbers the shortening up on the gap.

The shortening up of the duration of the gap.

Right.

Okay.

And then just one more question.

Can you give us a sense for how many quarters we might expect the positive credit provision, the draw down of the reserve to persist?

When J.P.

Morgan began to have a similar effect a number of quarters ago, they sort of gave the guidance that it would last for a few quarters.

I was just wondering if you have any similar guidance for us now?

No, we have to look at that on a quarter by quarter basis and see what's actually happened to the statistics in our credit portfolio.

And as I said, as long as they continue to be as good as this and continue to see improvement, then most likely we'll see continued releases of some of the credit reserves.

Okay, great.

Thank you very much.

Thanks, Guy.

Thank you.

Our next question comes from Glenn Schorr.

Please state your company name.

Glenn Schorr, CFA: Thanks, UBS.

Hi, Glenn.

Glenn Schorr, CFA: Hey, Todd.

So, you mentioned that it's not something that you're actively growing, but corporate loans did pick up over 2% sequentially for the first time in a long time.

Is there just underlying demand out there?

You'd think that would be a product of a strengthening economy.

I'm just kind of curious on the comment on the overall demand.

Yeah, I don't want to get too excited about 2% growth.

I mean we could see, you know, that happen as certain loans get paid down for short-term reasons and other loans get drawn down for short-term reasons.

So I would characterize that probably more as noise.

That said, you know, I would say that in general you're seeing good business momentum with most businesses around the world.

You start to see them access equity markets more.

They're still accessing the debt markets and you're beginning to see demand for capital that you maybe hadn't seen a year ago or two years ago.

So I think it's again, I don't want to overstate the growth part of it because that can be noise in any one quarter, but I do think we see healthier economies out there and more demand for capital.

Glenn Schorr, CFA: Okay.

Similar comment, this could be a short one.

But in consumer credit quality, you mentioned in your remarks that given the robustness of the economy, the improvement in delinquencies, I guess some of us thought that we'd see more improvement in credit quality in the near-term.

Is this just a timing thing?

Was there some seasonality in the first quarter to give us flat in that charge-off race X Sears and Home Depot.

You're talking about cards, yeah?

Yeah, that's mostly a seasonal thing.

Bankruptcies continued to be, although not picking up much, we didn't see a big improvement in bankruptcies during the quarter from a year ago and actually it picked up a little bit, which they tend to be seasonally from fourth quarter.

So, I would characterize it more as a seasonal adjustment, but delinquencies look good, continue to improve.

I think you'll see good, steady, improving credit quality in the consumer business.

And in general, the consumer credit results tend to be steadier.

You tend to see results change in a much slower pattern than you do on the corporate side.

Glenn Schorr, CFA: And has anything changed in your thought process on how Sears, Home Depot seasons as the year goes on?

Or is that right on track?

I think it's right on track.

I would say in general we're doing a bit better on the credit side in Sears than we had anticipated.

You know, as we brought them into our systems and our approaches on how you think about underwriting and how you think about collections, we tended to see a lift from that, but I think the business dynamics that we talked about when we bought the business and we talked a bit about last quarter are about the same.

You should see, you know, higher net interest margins in that business and higher credit losses than what you see in the bank card business with the margins, the net credit margin being about the same and the returns being about the same as the bank card business.

That seems to be going on track at this point.

Glenn Schorr, CFA: Great.

Last one.

Private client, as you mentioned, revenues up nice at 11% sequentially.

Earnings up maybe only half of that.

Was curious, I noticed the FC count dropped by about 170 people.

Is there severance in the expense line?

Should we see better leverage going forward?

You can't ask for much more than 24% margins, but your peers seem to be building while you're taking down the FC head count?

No, I wouldn't characterize it as taking it down.

There wasn't really severance in there.

You know, we didn't take our FC count down in the past couple years the way others did.

We kept it relatively flat, you know, we lost some of the low performers who in a difficult market have a hard time making a living in that business, but we kept our high performance.

So, I think what you're seeing is probably others, you know, cut significantly and now need to rebuild and we don't have that need.

On the expense side, you know, the increase sequentially was more, there's a fair amount of legal costs in that business currently.

That's part of the headwind that we're facing in areas across the company and some of that exists in the private client business.

Glenn Schorr, CFA: Great, Todd.

Thank you.

Thank you.

Thank you.

Our next question comes from Mike Mayo.

Please state your company name.

Michael Mayo, CFA: Prudential Equity Group.

Hi, Mike.

Michael Mayo, CFA: Hi, Todd.

Just a question about expenses.

I guess they were up 6% linked quarter.

And if I'm doing this correctly, compensation was up 13% linked quarter.

What's your thought about expenses going forward?

What kind of growth rate, et cetera?

Thanks.

Thanks, Mike.

I think, you know, in general, for the company and it's hard to generalize across each one of our businesses because there are some businesses where we're investing significantly in marketing and advertising and some businesses we're not making that kind of investment in expenses to [inaudible] future growth but if you look at the company in total, I think, what we'd expect to see during the year is continued [inaudible] and that's something that I talk about a lot.

Something that Chuck is very focused on and talks about a lot.

We want to make sure we're making smart investments.

We don't want to strangle businesses that are in growth mode.

On the other hand, we expect that, you know, we expect to be judged as good business managers, which means, you know, we expect to have more revenue growth than expense growth.

Over time.

So, I would expect that as we get into the second quarter, third quarter, fourth quarter, you will see that same relationship where revenue growth will be several hundred basis points higher than expense growth.

And I think we'll see that.

Again, it's hard to pick a number because some of the expenses is directly related to revenue growth, so, you've got variable expense it moves with revenue growth.

Some of that will be tied.

But we do expect to see a good, positive operating leverage each quarter this year.

Michael Mayo, CFA: And then separately, if we can take out the suspense of waiting for the Q, I guess your last Q said you would get earnings would get hurt by what --

Mike, let me interrupt you, the other part to that in a link basis, I think also if you dig into the expenses from fourth quarter, we had very low comp expenses in the GCIB as we adjusted the comp expenses there for what we thought we're actually going to pay during the quarter.

That resulted in a low comp accrual in the fourth quarter.

So, the linked quarter expense analysis is a little bit skewed because of that.

Michael Mayo, CFA: Okay.

Thank you.

And then separately, I guess your last Q said you'd get hurt by what, 2 to 3% to earnings with a 100 basis point increase.

What would the number be in your next Q?

It will be down a bit.

It will be down a bit.

But again, the focus that we had was a little bit less on the very short-term because our view has been that the low rates will be anchored, our view has been for a while now that the low rates would be anchored, the short rates would be anchored for some period of time, but we're more focused on shorting the duration of the gap and so that as you look at over, you know, a year and a half, two years, three years, you start making money in the situation.

Michael Mayo, CFA: And this is a tough question, but how would you factor in the upside potential under that scenario with higher rates of much stronger international growth?

Is that sort of factor part of your sensitivity analysis?

And what is that sensitivity analysis?

I'm sorry, Mike, you will have to ask that again.

Michael Mayo, CFA: In other words, if rates go up 200 basis points, you're going to have your earnings hurt per what's in your 10-Q.

Under the same scenario, GDP growth would be a lot higher.

In the first 12 months, that's right.

Michael Mayo, CFA: Which wins out and how do you get there?

Whether it's just a better economic growth, generate more revenues than you'd otherwise lose from some of your interest rate positioning?

Yeah, you're right in all of that.

That makes it a difficult question because the answer is it depends.

It depends on why rates are rising in the U.S., for example, which may or may not be connected to growth internationally.

Typically a little bit more connected to what's going on to U.S.

GDP growth.

Obviously there tends to be some relationship between the two, but it's not always 100% connected.

But I would say that except for extraordinary circumstances of the need somehow to protect a rapidly falling dollar or something unusual like that, I think you will see rates only rise when you really start to see robust economy and you start to see some signs of significant inflation in the U.S.

And what that says to me is that means we're now out of this whole overcapacity situation that we've been in for several years.

We've eliminated now the overhang from the boom times and you're seeing robust employment in the U.S., all of which lead to very strong capital markets activity.

It should lead to very strong volumes on the consumer side, both in investing products as well as in credit products.

And it should result in good credit performance.

So, I think the offsets would be positive.

In general, I'd be happy with a stronger economy and higher interest rates.

Michael Mayo, CFA: All right, thank you.

Thank you, Mike.

Thank you, our next question comes from David Stumpf.

Please state your company name.

David Stumpf, CFA: A.G. Edwards.

Good morning, Todd.

Good morning.

David Stumpf, CFA: Focus on the card business for just a second.

The net income numbers in the domestic card business, I know there is some seasonality linked quarter, obviously, but could you give us your best guess as to how much of the year-over-year and linked quarter net income numbers were affected by the acquisitions?

In other words, what would the numbers have been without acquisition?

Well, in North America, a significant amount of the increase in income from a year ago was from the acquisitions.

There's no question about that.

That was a very positive thing for us. [inaudible] Got us in a significant way strategically into this private label business which we think is an important growth factor in the U.S. as well as elsewhere.

If you looked historically at the last couple of years, so, first quarter of '03 versus the fourth quarter of '02, and the first quarter of '02 versus the fourth quarter of '01, you would have seen seasonable declines of about 21%.

And this year we saw seasonable declines in the fourth quarter of about 14%.

So, I think we've got a lift, clearly got a lift out of owning Sears and owning Home Depot this year that we hadn't gotten in previous years.

David Stumpf, CFA: Okay.

Is it safe to say, though, I mean the Sears came in guess in November.

It's safe to say that you haven't even barely begun to realize any of the expense savings or profit improvement that you would expect to get out of that Sears portfolio?

I think there's a significant amount over the next couple of years of improvement we're going to get from achieving the expense saves.

They do take a while to get.

And from not only being better at recovering credit but also being better at underwriting credit.

That obviously takes a while for our underwriting to work its way through of the business.

So we do expect increased income on a quarterly basis from Sears over the next couple of years as we start seeing benefits and as we start seeing growth out of that portfolio.

David Stumpf, CFA: Okay, and then one last little more detailed question.

On page 7 of the supplement, you've got your managed loss rates for card.

And you break it out as bank card and private label.

The bank card number, not looking at private label had a pretty substantial jump linked quarter, fourth quarter to first.

Is some of the Sears in that or is the Sears all flow in private label?

No, Sears was a portfolio, both private label and bank card.

David Stumpf, CFA: Okay.

And if you remember, we talked about the fact that, by the way, first of all I should say that the fact that you point to a page in the supplement just warms my heart.

You've been reading it so far so I appreciate that!

He's been listening! [ Laughter ]

They had a bank card portfolio, some of which, you know frankly, they made a mistake with.

They went out and tried to do the balcon-type advertising, it kind of blew up them.

It was a high loss rate piece of their bank card business.

Within that business is a high rate loss piece.

And part of what you're seeing the pig working through the snake here.

That piece of it.

David Stumpf, CFA: Does that explain all of the increase?

Or were losses up beyond just the addition of the Sears piece of that?

Two other things.

First, the rest of the Sears bank card portfolio which is pretty good, was in general higher loss rate than Citi cards is.

And the rest of it is seasonal.

David Stumpf, CFA: Okay.

So, there is a little bit of an increase and it's seasonal, outside of Sears?

That's correct.

David Stumpf, CFA: Okay, thank you.

Yep.

Thank you.

Our next question comes from Andy Collins.

Please state your company name.

Yes, Piper Jaffray.

Just a follow-up on Mike's question on expenses.

I guess $270 million related to higher options, pensions and legal costs.

I wondered if you could give numbers on those as well as any other numbers that are supporting customer initiatives, that's also part of the press release?

I wasn't going to break those out separately.

I would say that the single largest piece of the increase was the legal piece, the pension piece was the second largest, I'm sorry, the option expense was the third largest and pension was the second largest.

Sorry, let me try that again.

Legal expense was the largest piece of that increase.

Okay.

The option expense and pension expense was second and third.

Okay.

So, that was sort of how it broke out.

Anything in terms of the customer initiatives, marketing, those kind of things that may be just in the first quarter, as opposed to, you know, additional ones, second, third, fourth?

No, I think it, I would say in general last year was probably the big year-on-year swing because we had been very careful in our expenses back in '02. '03, we're clearly spending more but I guess we felt that we didn't want to break out specific numbers because I don't want to get into a debate about whether a certain branch opening is additional investment or just part of the normal business.

But I would say clearly, again, as opposed to two years ago and three years ago, when we were very concerned about the economy and we thought it was wise to reduce investment at that point, we feel differently today.

We feel it's important that in places like Asia that we're building our consumer finance businesses, that we're building branches and that we're building our retail branches, that places like international cards and U.S. cards that we're spending additional money on marketing, than in places like consumer finance.

We're spending additional money on advertising marketing.

So, banking is the same thing.

So, you know, we feel like the world is headed back into a growth mode and now it makes more sense to be investing more.

Okay, just one unrelated question.

On the tax rate going forward, you kind of alluded to that some of the competitor rates are a lot lower.

Kind of wondering what you think the optimal expense rate is or could be?

Well, I think my expectation for the year is we will be around this range.

Okay.

What about the competitors?

How low are they?

And, you know, where we would see the most upside from that?

From the competitors?

Or from you relative to your competitors.

Again, I think for this year as we continue to focus on, you know, what might be possible on the tax side, I think we're going to end up somewhere around this rate for the year.

So, I don't think we'll see a reduction in this rate for the year.

Great, thanks, Todd.

Thank you.

Thank you.

Our next question comes from James Ellman.

Please state your company name.

SeaCliff Capital.

I was hoping you could just discuss your appetite for acquisitions?

Particularly how important are international acquisitions versus U.S. acquisitions?

And I realize you may not want to comment on particular rumors and particular comments in the marketplace, but how important is it to your firm to add a large U.S. branch network as well as a large mortgage bank to your franchise?

Thank you.

This is Chuck Prince.

I suppose everybody would be surprised if we said well, we do want to announce that today now that you asked the question, wouldn't we?

We obviously don't comment on any rumors, but I've said publicly a couple of times that our interest is not in trying to hit grand slam homeruns or to shoot a moose and drag it home for everybody to feast on, we're not looking for that kind of a transaction.

We are interested in smaller things.

KorAm is a good example of that.

Acquisitions have been part of our history and I would expect that they would continue to be.

But we are focused on our international business and we're focused on the kind of transaction that fits very nicely into our existing platform.

Very good.

Thank you.

Thank you, our final question comes from Aaron Kadel.

Please state your company name.

All my questions have been asked and answered.

Thanks.

Thanks, Aaron.

Thanks everyone, for joining us.

If you have more questions, feel free to give us a call.

Bye-bye.

Thank you.