花旗銀行 (C) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Citigroup's first quarter 2005's earnings review featuring Citigroup's CEO, Chuck Prince, and CFO Sallie Krawcheck.

Today's call will be hosted by Art Tilsley, Director, Investor Relations.

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

Today's conference is being recorded.

If you have any objections you may disconnect at this time.

Thank you.

Mr. Tilsley, you may begin.

Thank you, Operator and good morning, everyone.

Thank you very much for joining us for our first quarter 2005 earnings presentation.

Chuck will start the call with some opening comments and then Sallie will take you through the presentation and then both Chuck and Sallie will be available to answer any questions you have.

With that, let me turn it over to Chuck.

Art, thank you very much, good morning, everybody.

Thanks for joining us.

We're here to talk about the quarter.

We had great quarter and I feel very good about the numbers we're reporting today.

Obviously any time you have record net income you feel pretty good and that was the case this quarter and several of the particular parts of the company really stand out and Sallie will go over that in just a few minutes.

Let me just highlight a couple of things that are top of mind for me as I think about the numbers and to the extent that's helpful for you.

We had very good revenue growth.

This was not about loan loss reserves.

We had good revenue growth, up 6% in the quarter, with record revenues in Retail Banking, fixed income and transaction services.

And on fixed income, I've said it before, I'll say it again, we have the best fixed income business in the world.

Retail Banking was also, as I said, up very strongly, 15%, and transaction services up 21%.

These are good, solid, organic growth revenue increases, and we're very proud of the revenue growth this quarter.

Expenses were up but importantly, we're making very good progress towards positive operating leverage.

Sallie will go over the details in a minute, but 4% of the 12% expense growth represented repositioning costs which will help us as we go forward with our expense base and obviously if you take that out of the 12, then it was 6% revenue against 8% expense growth and so the trend line towards the positive operating leverage that we have said unambiguously we are moving towards is showing very well.

Within that we are still investing for our future growth.

We opened 94 new branches in the first quarter, more than one a day, slightly more than one a day.

We're expanding our relationships.

We closed the acquisition of First American Bank.

So even within tight expense controls we are moving forward with our investments and that feels pretty good for future growth.

It obviously is still a good credit environment for us although we do not have the loan loss reserve issues that many of you saw as something that was not quite the same as regular earnings last year, but it's still a very, very good credit environment for us.

Capital allocation is something that's been high on our list the last year or so, and obviously you all know that the sale of Travelers Life is part of that as well as the manufactured housing portfolio, and we completed the sale of our leasing transportation portfolio.

I want to emphasize that this capital allocation review is a continual process.

That is, we are always looking at our businesses, always trying to evaluate where we should put our capital, how we should grow.

It's completely impartial.

I was part of the effort to acquire the insurance companies in the past and I'm obviously part of the effort to have those go away from the company now.

Our strategic goals are leading us in the direction the numbers indicate.

The board has authorized the share repurchase, which I believe expresses a real level of confidence in the strength of our businesses.

We're generating a lot of capital through our industry leading returns.

That, in addition to the significant capital we will get from the Travelers Life sale lead us to the point where we believe that a part of that capital can be returned most efficiently to the shareholders through the stock buy back while keeping a part of the capital for our future growth.

Let's see.

What else?

I think I'll just close, if I may, with reminding everyone how we're executing against our strategy.

Our strategy is expressed simply in four buckets.

First, to be the most respected financial institution.

Second, to grow consumer.

Third, to grow international.

And fourth, to make sure that GCIB is absolutely best in class, most respected.

Obviously we rolled out our Five Point Plan in the first quarter.

March 1st, all 300,000 employees gone through an initial series of training.

We're starting a second level of training for all 300,000.

We're starting full-day training for our 3,000 managers, and we have a whole variety of Five Point Plan initiatives which we'll roll out over the course of the year, and implementation of this plan is our top priority.

Grow consumer.

Obviously you can see through the details of our consumer business that we're doing very well, over $12 billion in revenue in the quarter.

And expanding that, I mentioned the opening of 94 new offices in the quarter is a key priority for us.

Growing international.

Much of that international consumer, of the consumer growth is international, and revenues and net income increased very nicely in the international consumer space this quarter.

We feel very, very good about the international business as it relates to consumer.

The corporate side of international is not quite as robust, and I'm sure Sallie will talk about that in some detail and ensure GCIB is best in class.

We were ranked number one in global debt, equity, and equity-related underwriting again, with greater than 9% global market share and so we continue to fight our way in that business in tough competitive environments but I feel very good about how my colleagues downtown are doing in my old home.

Overall our competitive advantages, our global business platform which distinguishes us from others, our distribution strength, we're really a great distribution company, and having the best brand in the world doesn't hurt.

These are competitive advantages that are difficult for anyone to replicate, at least in any moderate period of time.

With that, I'll turn this call over to Sallie who can go through our numbers in detail.

Thank you, Chuck.

Good morning, everyone, and thank you for joining us this morning.

I'm going to take through the deck which I hope you all have or have pulled off of the Web site.

So I'm going to go ahead and start and plunge right into the numbers.

I'm going to start on Page 1, our first quarter 2005 summary.

As you can see running through this, we are pleased with the quarter.

During the course of the quarter we had net revenues of $21.5 billion which represents a result that is up 6% over last year.

Net income of 5.4 billion, up 3%.

Net income from continuing operations, which, as you know, we sold Travelers Life & Annuity and Argentine pension business to Met, up 3%, at 5.2 billion.

Diluted EPS $1.04, again up 3%, and diluted EPS from continuing operations at $0.99, up 3%, and a return on common equity of 20.3.

Please note, I noticed then a little bit of confusion this morning that the net revenue number, or the discontinued items, come through as one line into our income statement, and one line on the asset side, and one line on the liability side in our balance sheet, and so therefore, the net revenues of 21.5 billion represent just the continuing operations as GAAP dictates, but we've given you detail in the statistical supplement that we hand out so that if you want to compare to prior years, on Page 27, you can see that we had 1.4 billion in additional revenues from our discontinued ops.

So we'll be around to answer any questions on that.

Going through, record quarterly revenues in Retail Banking, fixed income, and transaction services.

Record earnings this quarter in Retail Banking.

Very interesting to me that we reported as a company record earnings but did not have a lot of records within the businesses and so what I think this represents is a lot of our businesses are doing quite well.

We did have positive market valuations in private equity, which were favorable for us in the quarter, and in our core businesses what we saw was continued growth in our customer balances, which is always good to see, continued good credit, although as we mentioned on the last call, and as we promised, the positive impact here this quarter is really through the net charge off line with the notable reserve releases that we had over the past year behind us and really behind us in not impacting this quarter.

So we had the good credit.

These two things, as the interest rates have been rising, offset the spread compression that we're seeing, of course, in our businesses.

As Chuck mentioned, we had negative operating leverage in the quarter which we know is a metric that all of you watch closely and that we watch closely as well, but I think as you look and go through the numbers, you're going to see that the trends here are in the right direction, both on a year-over-year and a quarter-over-quarter basis, as this company really works on both sides of the equation, working to invest in the business so that we can grow revenues as well as taking in this quarter some repositioning actions, which cost us $272 million after tax, or $0.05 a share, that we believe will help set us up well for the rest of the year and going forward.

The negative operating leverage we believe is going in the right direction.

In terms of the environment, lowered economic and market volatility which we saw during the quarter, paved the way for our international businesses to sort of bifurcate in terms of their performance.

You know how important international is to us.

International consumer net income was up 9%, as the lowered volatility enabled that business to continue growing.

International corporate, because of the lower volatilities in the market, didn't have as much trading opportunities in those parts of their business and so were down 18%.

Now, I should note that each of these are GAAP numbers, and so therefore, does include some significant repositioning costs and so are substantially better than those results on what one might view as an ongoing type of basis.

Strategic actions during the course of the quarter.

We sustained our investment spending to expand our core franchise although you're going to see the incremental amount, which we'll lay out for you, is a bit less this quarter than it was, of course, a year ago.

We announced the sale of Travelers Life & Annuity and our manufactured housing loan portfolio, we've closed our divestiture of Citicapital Transportation Finance, we closed, toward the end of the quarter, our acquisition of First American Bank and ABN Amro's direct custody businesses.

During the quarter we were back in the market repurchasing shares.

We had, of course, been out of the market for a sizable part of last year.

We repurchased 19 million share and as Chuck mentioned, we announced this morning that the board has authorized the repurchase of up to an additional $15 billion in common stock, which we would look to execute over the next 18 months, and we think this gives us a very nice mix of how we use our capital for growth of the businesses for dividends and for the buy back.

I mentioned earlier the discontinued operations, as you know, they include substantially all of our life insurance and annuities business and the Argentine pension business.

We also took the opportunity to increase and improve the disclosure in Citigroup alternative investments, which was called proprietary investment activities, but we've given you all a little bit more information to help you better analyze that business.

Yesterday when we sent out a preview of this, of the discontinued ops and how we show it to you, we got some [hate] mail about this, and we just want to be empathetic with that but of course, the SEC doesn't leave us any choice here in terms of how we present that.

Yeah, and grow up, hunh?

Now, Chuck.

Now, speaking of things that often drive y'all crazy about Citigroup, I'm going to go over to Page 2, and Page 2 we try to take the significant items that we have in the quarter, that we're going to have every quarter given the type of company, given the size of the company, and the places that we are.

We try to provide this list of significant items to make your lives easier and bring it together, things name impact us in one place.

So going through this, I mentioned earlier the sale of Citicapital Transportation Finance, sold to GE, had a net income gain of 111 million, EPS impact of $0.02.

We sold the manufactured housing loan portfolio to Clayton Homes, a negative $0.02 for us in the quarter.

And we resolved some litigation involving Golden State Bancorp that goes back and is left over from the 1980s thrift bail-out, and that was a penny for us.

I mentioned earlier the repositioning costs.

We saw them really, or we effected them really across our businesses.

In Global Consumer, we consolidated some of our customer service centers and we moved some jobs in international markets from higher cost areas to lower cost areas and that cost us $95 million after-tax in the quarter.

The CIB, I know, has been reported on.

We primarily had severance costs there of $151 million after-tax, a little bit in Global Wealth Management, 22 million in Asset Management as well.

So on Page 21 --

We're skipping to the end of the pages?

Yeah, I got a little tired of talking, Chuck, so I thought I'd go to Page 21.

But on Page 21 we're going to provide you a more detailed listing [inaudible] there of the significant items for the quarter and also a reminder for you of some of the items that impacted last year's first quarter.

In that quarter we had a $180 million after-tax gain from our sale from EFX, $150 million loan loss reserve release, and $150 million tax benefit.

And I was just showed, it's actually Page 19, so my apologies for that.

We don't do the subtraction.

No, we don't.

We just give the numbers.

On Page 3, our summary income statement.

This is a GAAP income statement, so for those of you who like to look at managed income statements this is GAAP.

You can see here, as we mentioned before, net revenues up 6%, operating expenses up 12, there's our negative operating leverage, offset, the increase in operating leverage, offset by the good credit, good net charge offs that we're seeing on the credit side.

Income taxes and minority interest.

The income tax rate you can see at the bottom up 2, as we had indicated last year, a more normalized level, 32% versus 31.2% last year, providing a drag on that 6% pretax income, getting us down to 3% on both a discontinued, sorry, excuse me, a continuing operations and net income basis.

All right.

Let's turn to Page 4.

Beginning on this page what I'd like to do is start to work our way down the Citigroup income statement, okay?

So we start with revenues, as we tend to do an income statement, and put for you on the left-hand side, revenue growth by region.

On the right-hand side we're going to break out for you in these pretty autumnal colors, the results of our two largest business, the consumer business and the corporate and investment bank.

So working our way down again, this does not include our discontinued operations, just the continuing ones.

Asia continuing with really great performance for us on the revenue side, up 16% in the quarter.

Terrific results in the consumer business. 30% revenue growth.

That business is in very good shape.

The up 7% for corporate, this is off of a strong first quarter of '04.

We saw a little bit of weakness in our equities business, which really went down, which went across the equities business from the institutional side to some weakness on the retail equity side, but all in all, if you look at our businesses, they're very healthy in Asia on the corporate side.

EMEA up 8%, more moderate growth in these more mature economies.

As we look to the right, 9% consumer top line growth and nice to see in EMEA on the corporate side, a record revenue result in the quarter.

We had the Citigroup results for you there, up 6% on revenues.

Our consumer up 4, the CIB, the GCIB up 10.

Mexico up 5%.

Very interesting dichotomy of results in our Mexican business.

Up 15% on revenue in the consumer business and that's even with the consumer finance business being a little one and beginning to grow for us.

In terms of the corporate business in Mexico, you can see down 22%, which I think are the results you have not come to expect from us in Mexico.

The story there is a flat as a board yield curve as well as lowered volatility which led to fewer trading activities in the business but the corporate customer business is still quite strong.

North America. 0% revenue growth stands out there.

I'm going to go into more detail about that as we go through the businesses, there's some interesting dynamics in cards and consumer finance that I'd like to discuss with you, and a terrific 21% result in the corporate business.

Latin America.

A little bit of the same story.

Corporate versus consumer, consumer up 15%.

Lowered volatility makes the corporate business down 4%.

And Japan continuing to feel the effects of our issues in Japan, a little bit here on both the consumer and the corporate side of the business.

All right.

Page 5, then, a different cut of revenues for you.

This cut, of course, is by the business line, and, of course, we look at our business in both ways.

Transaction services really continues to power through at up 21% revenues, retail banking up 15, the capital marketing and banking, et cetera, up 8.

What you might note, is at the bottom of the chart, Smith Barney asset management private bank, all down on revenues.

These are our more equity and retail market sensitive businesses which experienced some tough top line and bottom line results this quarter.

Page 6.

Last quarter we highlighted for you some of our investments and this quarter we thought we'd provide a bit more detail at your request on one of our businesses, retail banking, to give you a feel for where we're making our investments, the types of things we're doing and how we're spending the money there.

Retail banking is of course a business that we've invested in in small and medium size fields over a period of time.

KorAm, of course, which has been very helpful to us in Korea and in Asia we bought in May of '04.

The latest acquisition is First American Bank, which we closed on March the 31st, gives us an additional $4 billion in assets, 106 branches in Texas, including the major Texas markets.

That's a market that represents 6% of U.S. deposits and gives us a great way to plant the Citigroup flag, and then we can, with that base, grow out additional branches in the region.

So we feel we're looking forward to having First American as part of the Citigroup family, so to speak, and we think it will be a good beachhead for us in Texas.

We also, on the right-hand side, we don't invest one way or the other.

We invest both, have invested both through transactions and organically.

And on the retail banking side, we've, likewise, been investing organically.

We opened 44 branches in 2004 and 14 net on '05.

We had some where we opened some and closed some others, six in EMEA, seven in Asia.

A little bit of everywhere.

The important thing, because we do not have a coast to coast U.S. branch network it's important for us to try to effectively leverage the network that we have and to get customers in different ways.

And one of those businesses that we're particularly proud of is our bank at work business which gives us 26% of our new accounts.

We oftentimes get these accounts with the help of some of the colleagues in the CIB.

Citibank online also is an important way to leverage that branch network where we have 24% bill pay penetration, which to my understanding is nicely above industry averages.

In addition to the full range of banking products, which everyone else has, it's always nice to bring to your customers things that only Citigroup can deliver to them and so I was very proud to see with all the hard work of the people in the consumer bank and in my old group, Smith Barney, did, really over the course of a couple of years, getting access for the Smith Barney customers to the Citibank branch network which rolled out, I think it was in March, just a couple weeks ago.

This is something that is unique to Citigroup, that only Citigroup can bring because it brings together the bank and brokerage business.

In addition, another thing that we are rolling out that's exciting for us, and that only Citigroup can bring, you've heard us talk about, in a very pleased fashion, our thank-you network, which is a unique rewards network on the cards side.

It's going to be launching this weekend in the retail bank and so to be able to pull together the cards and the retail bank through this unique program, we think is an exciting opportunity for our retail bank.

Advertising and marketing, of course we spend money there to help support the branch network, but I tell you, the I think the that's interesting to me, is to look at the money they're spending on customer service and the good things that they're able to affect by being very customer focused, as all of you know, Marge and her team are in this business.

Education and guidance.

This organization has had 2,000 seminars reaching out to 30,000 existing and potential clients on the topics that they find really hits home for people these days, which is identity theft.

And clearly it's a topic that Citigroup has sort of made an important one through its cards business and is taking it into the retail bank business and into Smith Barney as well, and has a tremendous amount of interest that resonates with customers.

We also have put real effort into the issue of problem resolution over the past year and the organization has cut their problem resolution time in half.

The result of this is the checking accounts, the attrition of checking accounts is down 340 basis points in the past year, and interesting to me to see, attrition in what we all know is a very competitive New York-Chicago corridor, attrition for us is even less than it is for us nationwide, so this in turn has led to, in this quarter, a 9% increase in our checking accounts in the U.S. year-over-year, which we all believe serves as an important bellwether of the customer relationship.

Moving along, Page 7.

I'm going to turn now from revenues to expenses.

Expense growth we break out here for you as we have, I think, in the past couple of quarters, showing the increment in expense growth first quarter of last year, the first quarter of this year, again, this on a continuing operations, or GAAP basis.

Of the 12 points of expense increase, breaking that out for you, we had two percentage points of incremental investment spending, not total investment spending, incremental investment spending.

The branch expansion, Chuck had mentioned some numbers there.

Consumer Finance branches, 69 net new, 27 in Mexico, 12 in EMEA, and Chuck, we'd also mentioned the new eight new retail bank branches.

Advertising and marketing, clearly spending there as well as in technology given that this is a technologically intensive business.

Three points of the expenses due to acquisitions and FX.

Four points of the increase is repositioning costs, the $272 million after-tax that I talked about, and three points of it is business as usual, and of course, some portion of that is driven by the fact that our revenues were up 6%.

So if you're looking at expenses quarter-over-quarter instead of year-over-year, we're flat and feel very good about the progress that we're making there.

Page 8 --

We're sticking by our positive operating numbers.

That's right.

Credit quality, let's go to Page 8.

We'll look first on the consumer side.

Net credit loss as a percent of average loans what we continue to think is the best it can get gets just a bit better and you can see by business cards, consumer finance, retail banking, down in the first two in terms of NCL, flat in the third one.

The same trend we're seeing on the 90 days past due as well.

Next page is corporate.

The corporate business, the net charge offs remain.

We remain in a negative net charge off position.

That is, we are getting back money, and the cash basis loans again continues to decline.

Thank you.

Let's go to Page 10, then, because I wanted to spend a second, again, as we did last quarter, pulling all this together for you which gives you a picture of our income statement with pretty blue and green lines now.

Let me remind you how to read this.

Up is good, right and down is bad.

And so if you have a negative expense, so expense gets better, then it actually goes up, okay?

Or if you have a declining revenue that goes down and hurts that you way.

So I think, again, a pictorial representation.

Just think up is good, down is bad.

And as we work our way through here, I think what you see as you look at the company is that your average loans, average deposits, average earning assets, up 14, 15, 16%.

Very good growth in the customers.

I think the customers have good things to say by giving us their business and by growing the balance sheet in this attractive way.

This translates directly into 16% interest revenue growth offset by an increasing cost of funds.

I'm going to talk about this a bit more in a second which here leads to a net interest margin that's down for us over last year.

Net interest margin typically is about half of our revenues.

Look at other revenues.

The other half up 18%, so well overcoming that for 6% revenue increase.

Expenses, as mentioned before, up 12%, or bad of 12%.

And the little dotted line there we put for you if you care to X out the repositioning costs.

Cost of credit, this is not loan loss reserves, this is just the NCLs, better by 17% for us.

Taxes, as I mentioned, hurt us and the whole thing works its way through to a 3% earnings growth rate over last year.

Now, let me give you a few words on the chart because I think given our mix of businesses it's not quite as straightforward for Citigroup as it would be if we were a pure play bank.

So, for example, the GCIB, which is a very nice portion of our balance sheet, drives a very good bit of this increase in our cost of funds.

That's because it, like other securities firms, funds itself short-term.

And so this quarter, as our short-term rates went up, in line with other securities firms, it actually had a negative net interest margin.

But the trades should be looked at, for those of you who are very familiar with brokerage companies, when you look at the success of a trade, the trade should be looked at on a net interest margin plus principal transactions, right, to sort of bring the trade together.

And if you look at principal transactions, those are 59% for that business in the quarter, so a very favorable result, a very favorable trading result for them in the quarter.

Now cards likewise, our international and North American cards business is of some interest here as well.

Marge and her team, as they have communicated to you I believe at consumer day, manage the business on a net credit margin basis.

That doesn't mean that's how y'all have to look at it or analyze it or talk about it, but that's how they manage it.

And they do that on the view that too strong a revenue focus in credit businesses can be a mistake.

And again in the counter cyclicality because obviously it can cause you to do things you wouldn't otherwise do.

And given the counter cyclicality of revenue and credit in the business, they look at net credit margin.

So there as well we've got some pressure on the cost of funds, but this is well more than made up by cost of credit which is down 19% for net credit margin up 9%.

That ends that tutorial.

Page 13.

A little bit of detail on the businesses.

Page 13 is our snapshot of the businesses' net income.

I'll let you review this at your leisure, but I think what we see is good balance by business and by region.

Page 14.

Oh, I'm off the page.

I've got an old deck.

Okay.

Page 12.

Net income growth.

The next slide gives you yet another level of net income detail.

Here we do the product view, by product over on the left-hand side, retail banking up 13% net income, cards up 11 and so on versus the regional view.

We've given you that earlier for revenues.

Asia up 14%, Mexico up 10, North America up 9.

Let's turn to our consumer businesses, and I won't go though every one here but a few highlights in our businesses.

Cards.

Cards in what is a very competitive market.

We're really quite pleased with our results.

Up 11% for the entire business, up 9% North America, 18% on the international side.

In that business our net credit margin is up 9%.

In North America our sales are up 6%, our bank cards are up double digit, but we saw some softness in the private label business in the quarter.

We saw in the dynamics of the business a continuation of what we saw last quarter, high payment rates, leading to spread compression and very good credit and this is a result led to our net revenue down 3%, but net credit margin up 7.

International.

The business continues at a great pace.

International sales up 30 and loans up 23%.

Consumer finance.

I think there's an interesting story here in consumer finance.

We are seeing nice average loan growth year-over-year, but revenues are up just 1% in the business as Kevin and his team trade revenue growth for conservatism on credit at this point in the cycle.

So they had been moving the portfolio up a notch in terms of credit quality and had been trading revenue for good credit performance given some of the things that we see going on again at this point in the cycle.

Japan, which has been an issue for us in our international consumer business, looking quite improved, but the NCL ratio down quite a bit and net income up.

Bankruptcies for us down 46% over last year, and nice to see the real estate loans in that business showing some signs of life for the first time for us really in a while.

Opened 80 new sales points on a gross basis in the quarter.

As I understand it we're going to be active in Russia in the second quarter.

Retail banking, I won't belabor since I talked about that in some detail with good deposit and loan growth as well as core deposit growth.

Now I'm checking my page, Page 14.

Page 14, corporate and investment banking business.

But for those repositioning charges you would never be able to see this because of the way we've changed our disclosure over time, but for the repositioning expenses this was actually a record quarter for the corporate and investment bank.

So very please with those results.

Good revenue results, record fixed income revenues, the result of good interest rate positioning as well as strong commodities.

Underwriting volumes however, were down in the business as the customer business not as strong as it's been at its peak.

Net credit recovery we saw here of 46 million although there was an impact last year, this is less than last year because we had a $150 million pretax loan loss reserve release last year.

Chuck mentioned the table results.

Transaction services.

Again, real strength here across the different metrics for us.

If you look at your results you're going to see the business showed a bit of seasonality from fourth quarter to first quarter, but in talking to the business the pipeline is a record for that business so we feel very good about it.

Page 17.

Global Wealth Management.

Both of these businesses having a tougher time along with the industry and the transactional businesses, and this is despite good flows from clients into the business.

In fact, $13 billion positive net flows into Smith Barney is the highest we've seen in quite sometime.

And in the private bank client business volumes were up 9%.

That's even with Japan which of course we're closing down, and up 25% in the U.S.

Fee-based on both businesses doing well, up 7% on Smith Barney, but transactional revenues down 14% for Smith Barney, and down 42% for the private bank.

Asset Management and alternative investments.

Likewise, Asset Management is tied to the market and so we saw some pressure here through the income statement, pressure on revenues, assets under management, which I do recognize is not on the income statement, down 3%, although with some positive net flows which is fine to see, but a down 25% result for Asset Management.

And I mentioned alternative investments which is doing quite well in the quarter.

Now, before I turn to our returns and capital position, I thought I'd spend just a quick minute on what we're seeing through our businesses on the health of the consumer of corporate and the economy.

We've seen a consumer through this quarter who's acting very responsibly and very conservatively with their financials.

For example, as I mentioned, they're paying down their credit card debt.

The number of presented bad checks is down for us in the quarter, and the credit experience is very, very good.

They're also acting quite conservatively with regard to the stock market.

There's a pulling back that has occurred, and we can see this in the transactional business down, not just in the private bank and Smith Barney, which I showed you, but also in the businesses that we do within the consumer bank.

And we're seeing it not just in the U.S. but frankly around the world, which is interesting.

Small businesses are somewhat conservative while our investment banking pipeline shows a bit more strength among the larger companies although it's pretty industry specific.

Economies around the world are showing some strength and our business in Japan indicates emerging strength there with bankruptcies for the country down 9%.

But we're seeing Incremental weakness in Germany and the peak of the housing bubble, or the peak of the housing cycle, I should probably say, in the U.K., we are seeing the cooling off effects of that.

So all in all it's a pretty positive operating environment.

It's good to see the consumer is acting as responsibly as they are.

And I'd say it's moderately, quite moderately strong for us.

Getting to Page 17.

Superior returns.

As you certainly expect and should expect from us good returns across our businesses.

You may note, those of you who have been keeping good notes, that we put our cost of equity here, we had talked about our cost of equity being 10 to 12%.

As interest rates have gone up, we revisit this once a year.

We would take it up we think 11 to 13%.

And then finally, nearing the end, Page 20 is our capital page.

Total stockholders equity and trust preferred securities of 116.9 billion in the quarter, up from 108 last year, gives us a tier I capital ratio of 8.7, total capital ratio of 12.

These are but two of the multitude of the ratios that we look at that our rating agencies and we and the regulators look at, but on all of our, all the capital ratios that we look at the company is fundamentally quite strong in terms of the capital.

We paid out 2.3 billion in dividends this quarter and, as mentioned, repurchased shares.

Return on equity remains, we believe, remains nicely robust.

So overall I'd say no quarter's ever perfect, but I think the business heads here feel very good about their businesses and about how their businesses are performing and the investments we're making.

I think we feel particularly good that we have profitable businesses that enable to us generate capital to investment for further growth in the attractive markets with the breadth of opportunities we have, with all of our business around the world, and that we have the profitability to raise the dividend 11% last quarter and to announce a $15 billion share buy back this quarter

So with that, Art, should we open it up for questions?

Yes, Operator, if you would open it up for questions we're ready to begin.

[OPERATOR INSTRUCTIONS] One moment for the first question.

Thank you.

Our first question comes from Guy Moszkowski of Merrill Lynch.

You may ask your question.

Good morning.

First question is on the return on the investments you've been making in cards.

You gave us some color on the retail banking side but with respect to cards that was the largest piece that Marge and her team talked about on December 8th, I think it was that the global consumer day, something like $400 million, and yet we're still seeing asset balances declining and I think the card count also down somewhat in North America.

Can you talk about how we should look at that?

Yeah, I'll take a hit at it, and, Chuck, you can sort of move in as you'd like.

Let's start, Guy, if I can with international cards where, of course, we feel pretty terrific about the investments we're making.

We have a good position in the international markets in that those markets are growing quickly and we are in some cases sort of a first mover there so we're happy to see on the international card side 23% loan growth translating into about 18% net income growth for us over the course of the quarter.

We believe we're doing the right things there, we're getting very good returns on those investments and we're happy with that.

Now, the North American cards business is a very competitive business, as you know, and we are very pleased to see as we look at the investments we've made there, that we continue to grow in this quarter, grew at a 9% rate, and continue also very importantly to have a return on managed assets of 2.34%, which I'm not sure if that's, where that falls out in the industry but I've got to think it's awfully good, and it's a very high returning and profitable business for us.

In terms of the end of period open accounts, we of course have a little bit of seasonality fourth quarter to first quarter, but what we're also seeing as we look at over first quarter of last year, is that we have, we've got some Sears accounts that are primarily inactive that we have been sort of --

Culling.

Culling, thank you, Chuck, culling for us in the business.

So the account growth is certainly not double digit there, but once one looks at that and gets through the culling, it's fine for us.

Sales up 6%, so people are using the cards for us year-over-year.

And, again, we look at net credit margin, up 7%.

So I can't, you know, it is a competitive market.

People talk about it's been the most competitive market that we've ever seen.

We are, I should also mention by the way on sales, on the bank cards are up double digits, I think it's 12.5% growth for us.

All in all I think it's a very good result on our North American cards business and I think an excellent result in our international businesses but we continue to, on the margin, invest a bit more incrementally on the international card side and continue to invest some on the North American side as well.

Thanks.

That's helpful.

Can you give us a little bit more color in the major units in terms of the repositioning actions that you took, what sort of actions were you taking in those different units that will result in hopefully a lower cost base?

Yeah.

I would say, Guy, in the CIB, that is, by and large, very large.

It's people, it's headcount reductions for us, and so that, we would look to have a pretty fast pay back in terms of the saved compensation level.

Global Wealth Management as well, a number of folks in that business as well as we had a little M&A business that Smith Barney had where we closed parts of that, that weren't working as well for us.

That was money losing, and so that will be a very quick return.

In terms of the consumer side, we consolidated some of the customer service centers.

We had a number of customer service centers from Sears, for example, and so we consolidated the back office sites from 35 to 32 in the U.S., making some folks redundant as well as, of course, getting those costs down.

In addition, in Europe we had a customer service center, for example, some in the U.K., which were a little bit higher cost, moved them into Spain and to Poland to get some cost savings there as well.

So I won't say in many cases it was any big thing, but rather a series of efforts through the businesses that were both headcount reduction as well as, you know, some back office cost savings.

So the, presumably the fact that the GCIB comp ratio was about 32.6%, risk-adjusted, which was down from last year, and from last year's full year, is being colored by some of those reductions you took?

Well, in terms of the compensation and benefits line I think we're going to see some of the repositioning costs go through there as well, so we've got some pushes and some pulls on that number but we would certainly expect as we look through the year to see the impact of the repositioning expenses to have an impact on the CIB numbers.

Okay.

And finally, in CIB, within fixed income, can you give us a little bit of color for key product areas that were working well in the quarter and generally were we seeing the results of some of the sort of sharper risk taking that you were trying to do that you were talking about over the last year or two?

I don't know about sharper risk taking but I will tell you, if you're asking a question about the VAR number, that did go up somewhat in the quarter so the VAR number I think was an average of 110 in the fourth quarter.

You're going to seat go up by 10 or 15 or 20, let's call it 15, on average for the first quarter.

I think when you look, of course, at the results that we got from the CIB, this was risk well taken, and as mentioned, I think if you look at the results it was, the guys were well positioned, we should go ahead and be open about that, for the rising rate environment.

We also saw some increases in our commodities businesses in [FIBRO].

Munis did very well for us.

Really across the fixed income business.

As Chuck mentioned we think we have a pretty good franchise there and so did a pretty good job in the quarter.

Great.

Thanks so much.

Sure, thanks, Guy.

Thank you.

Next, Betsy Graseck, your line is open, of Morgan Stanley.

You may ask your question.

Thanks, good morning.

Could you talk a little bit about the buy backs?

I know that you announced the 15 billion in addition to the authorization you already have outstanding but it would be helpful if you could give us a sense of how you see that playing out.

I would think it would be to a certain extent a function of capital levels and opportunities for acquisitions.

Well, let me start.

Thank you, Betsy.

Over the last 12 months or so we've tried very hard to rebuild our capital ratios.

You have to have a very, very strong balance sheet to be in our business and to take advantage of opportunities as they come up.

So we think that we've done a very good job at accomplishing that, at achieving that.

And now as we generate capital on a quarterly basis, we have, as I've said often, we have four ways to do it.

We can invest it in the business, we can go buy something, we can increase the dividend, or we can do a buy back.

We've already increased the dividend this year, we are investing in organic growth, and we see opportunities coming ahead but the amount of capital we're general rating, especially with the Travelers Life sale, meant that we thought that we had more than enough for the ongoing state of the business, and we thought it was efficient to return some to the stockholders this way rather than to sit on it in a way which would depress our returns.

So it's really a balancing between the keeping enough to grow the business in various ways and not having a lot of capital sitting around not earning at an effective rate, so it's that balancing after we've rebuilt our ratios.

I think you said it well.

Well, thank you.

You're quite welcome, Chuck.

I think I would probably add, you know, clearly we want always to be investing in those things that are going to return above the cost of capital.

We also like here to have a feeling of capital constraint as well, and so that, you know, the best projects sort of come to light, and we feel very good about the fact that we are, we are fortunate and people work very hard at this company to produce a 20%-plus return on equity as well as the TL& A sale, which gives us adequate capital to both give you all a return on your investment dividends and share buy back as well as to invest for our business in the future.

Okay.

So should I read into this that the capital levels that you have today as of the end of the first quarter are such that you're comfortable initiating this program?

Sure.

Sure, yeah, I don't think we want to, I don't know that we want to talk about the timing exactly.

We've talked about we'd like to get executed over the next 18 months.

You can probably take a look at how you model out our earnings and how that will produce capital as well as the TL& A proceeds and sort of think about the timing in that way.

That's great.

Thank you.

Thanks, Betsy.

Thank you.

Next, John McDonald of Banc of America Securities.

You may ask your question.

Hi.

Good morning.

I was wondering with regard to the operating leverage that you expect to come later this year in the second quarter do you expect that to be driven more by revenues accelerating or expense growth decelerating?

We talk about operating leverage for the year, as we look at, I think, we as a management team forecast and would very much like to have both, and we are working on both sides of that.

We have been investing, as you know, for the top line, and we also, as you can see in this quarter, have been working on the, we work every quarter on the expenses but particularly in this quarter with the repositioning expenses, so I think we have to have a mix of it, which, for a company of our size and given our mix of businesses, I would think you would expect from us.

You notice, of course, I'm not going to give you any revenue growth numbers or expense growth numbers for either of them.

Okay.

So you're confident in saying that you expect it to come, was more, as a combination of both revenue and expenses?

I think that's right.

Okay.

Could you give us some more color, Sallie, on the funding cost pressure in cards?

Are you largely match funded in cards or is the card base more fixed rate in terms of the assets?

The cards that we have tends to be a bit more variable in nature and so for some good portion of that as the cost of funds goes up some of that can be passed along onto the cardholders but we do have some fixed rate, we do have some bal cons et cetera that we've talked to you about where clearly those numbers are more fixed in nature.

So in the cards business, on both the North American and the international cards side we are seeing an increase in the interest rate cost that we have, not all of which is getting passed through to the customers, but more than offset, is more than offset in terms of what we would expect to see in this type of cycle where we're having interest rates increase.

You typically have a stronger economy, exactly what we have, and therefore would expect to see this offset in this quarter more than offset by the good credit performance.

Is there any way that you can summarize the percent of the portfolio that's variable versus fixed?

I could but I'm not going to.

Okay.

Last thing was can you give us an impact of FX this quarter on the income statement and balance sheet?

The FX, actually this is a good brain twister for you.

The impact of the FX on both, on the income statement on the balance sheet was different in the quarter.

That's because for the income statement, we take an average FX rate, so it's a four point average during the course of the quarter, December, January, February, March, and what we saw on the average is that the dollar depreciated a little bit.

Now, what we saw on the balance sheet is we did it point to point, and the dollar appreciated a little bit.

It actually took me a few minutes when I first heard this.

I had to sort of look at it and walk it through.

So as you think about what the impact is on the balance sheet, you can go to our other comprehensive income, the other comprehensive income has changed by about 1.3, $1.4 billion to the negative.

Of that 47% of it was FX.

Okay?

The other 64, well, 64% because we actually had some good hedge stuff, was actually FAS 115.

Fun fact for you.

A third of that FAS 115 was actually TL& A, which, of course, we'll be seeing differently.

The impact on the income statement, remember, we do some hedging on our income statement in terms of the FX impact, so the impact on the income statement was, yeah, you know, not very great.

Not very great in the quarter.

Was it not very great positive?

Not very great negative or just immaterial?

Not very great positive.

Because we hedge it, because we EBIT hedge we don't end up seeing a lot of what you might expect from a company of our global footprint fall to the bottom line.

We believe this is of course a conservative way to manage and run our businesses.

So a very modest negative impact on the income statement this quarter?

Positive.

Very modest positive impact.

That's right.

Okay.

Thanks.

Thank you.

Next question, Ron Mandel, of GIC, you may ask your question.

I have a question about net interest revenue.

I know, Sallie, you referred to the trading aspect but when I look at the GCIB, net interest and dividends were down less than 100 million year-over-year.

And when I look at the broader picture, the average assets were up 14 or 15%, and net interest was down 5% or so and so, you know, it seems to me like there's a really significant disconnect between asset growth and the ability for that asset growth to generate revenue on the bottom line, and I guess, you know, so that's, if you could expand on that disconnect, and then going forward, I guess I worry about the pressure continuing on margins as rates rise at the same time that the credit picture flattens out, so that even the net credit margin might come under pressure going forward.

You and I have sort of us tussled on this for a while.

We have had good asset growth because we have had a little bit shorter on the IRE, or certainly the IRE has been a little bit bigger.

We have had the cost of funds kick up for us which again as we said, we believe well offsets by the good credit.

So we think, Ron, that if you can look at these things in part, you can get upset about part of it, but we have to look at the business holistically and that with good asset growth, which we're seeing in our consumer businesses, which we're seeing in our corporate businesses as well, and there was some pretty good asset growth there as well, that with the actions we can take on the revenue side with the growth we can see, that we can overcome the cost of funds through the businesses, through the credit, and through the other expense actions that we can take and can deliver good results to the bottom line.

We think we have to look at the business holistically.

We also believe that as we look at our interest rate exposure versus where the rest of the street is, we believe he we're in pretty good shape versus them.

We believe we made a lot of money over time by having the position that we've had.

We have not been of the view that rates would go up as quickly and for the past couple of years have been right.

So we feel very good about our rate positioning, forecasted the pressure in the business and continue to feel good about it.

Is there a possibility going forward that the, assuming the fed continues to raise rates, that measured pace, that the pressure on margins, on net interest revenue margins, will outstrip the improvement in credit quality?

Well, you have to forecast both the credit quality and the net interest pressure but clearly we manage our interest rate, we manage our customer businesses dynamically, and so if you take any part of it you can sort of work through it, but we are of the believe that the business, as we said, will grow this year and will have some good results on a operating leverage basis, on a net credit operating leverage basis as well so that's how we're forecasting.

Thanks.

Thank you.

Next, Glenn Schorr of UBS, you may ask your question.

Thank you.

Sal, quick one. 5.44 billion in net income, total assets were reasonably flat.

Curious to see that the tier I ratio stayed the same.

Any help you can give us there?

The tier I ratio is effected of course by a few things.

It's both the growth in income, now you'll recall we were back in the market buying back shares this quarter as well as paying a dividend so those were offsets for that.

And then the balance sheet, you know, was about flat but we had sort of some push and pulls there.

Dividends, yeah, that's it.

It's the dividends and the share buyback offsetting the net income there.

And then some pushes and pulls that are not particularly meaningful but lead us to a flat number.

That [inaudible] like a billion, right, and the dividend is, I forget, somewhere in the neighborhood of two and a halfish.

Two and a half, yeah.

So that still leaves 2 billion.

So does that just mean, it's not massive but does that mean the risky of business the assets just went up a little bit during the quarter?

Remember the VAR went up a little bit.

We have a little bit of a change in the goodwill and intangibles as they came on board from the first from the FAB acquisition, but if you can net those out I think you get to it.

Okay.

Thanks.

And just the second quickie is, on the approval of FAB, the fed comments that we've talked about, I just wanted to clarify one last point.

Were their comments based on previous events that we've all seen before or was there anything else that they know about that we don't know about?

Well, I think that the short version of your question is that there's nothing that is not public, that is in the mix.

Other words this is all, in my judgment based on the various factors that are in the past, whether it's Japan or other things like that.

Okay.

That's helpful.

Thanks, Chuck.

Thank you.

Next, James Mitchell Buckingham Research, you may ask your question.

Yeah, hi, good morning.

Two quick questions that are unrelated.

One, on the potential for the new bankruptcy law to be signed by at the President soon, can you give any sort of initial thoughts on the impact on the business?

And then I have a question on equity trading.

Yeah, I would say I think we're starting to see a bit of the impact from the bankruptcy law.

What we would expect to see is a little bit of a short-term pressure followed by a nice improvement next year as the bankruptcy law goes through.

To give you some numbers, within the cards business the bankruptcies typically run at about a quarter of our NCLs within the consumer finance business.

It's a bit higher although we tend to be more secured in terms of that.

Bankruptcies for the year have been running down about 4% year-to-date, but they've popped up in the past few weeks, popped up about 14% in the past few weeks.

So if these continue at this rate we are going to have an impact of some type, probably during the second quarter, we might see a little bit of something there as well as when this has gone through in the past we've seen a spike before it would be signed, which we expect would be sort of, I guess, it's in November type of time frame.

So we would expect to see some pressure of different amounts, but the range of benefits in the next year should offset the pressure that we would see.

Of course, as we are looking at our reserves for the business, clearly the fact that this had a chance of passing has been taken into consideration.

Was that sort in your consideration this quarter?

Yeah.

Yeah, we had a little bit of an impact this quarter from that, although not a great deal.

Okay.

Great.

Then on the equity trading side you guys were up about 28% sequentially.

Anything to think about there?

Was it more derivatives driven if you look at share volume it's pretty flat.

International, I guess, more color there would be great.

In terms of, if you're taking a look at the sequential numbers for the equity business we do, as you know we've been make some real investments in that business.

We have seen, in particularly investments in the equity derivatives portion, we have seen some positives on the equity derivatives side.

You may recall we bought Lava and Knight Trading, so that's giving us a little bit of help in the quarter as well.

It looks like maybe we gained on the cash side we are getting a little bit higher commission in customer flows.

If you're looking at flat numbers then that would indicate that we're gaining a bit of a share there.

Okay.

Well, Lava was in 4Q already, right, but did Knight close this quarter or was that late last quarter?

Knight closed last quarter.

They're both, of course, you take a bit of time, right, you sort of sign up customers, and you get things done.

So they are gaining momentum within our business.

Okay.

Great.

Thanks.

Thank you.

Next question, Michael Mayo of Prudential, you may ask your question.

Hi.

Could you elaborate more on the investment spending over the next year?

If I understood you correctly, you were looking to maintain investment spending above where it was earlier this decade but perhaps down from the heightened pace of the past year.

Where might you reduce some of that investment spending, when might that occur, and any other color you can give.

Mike, let me talk about it and then I'll let Chuck talk about it in a second.

I'm not sure that we said we looked to reduce investment spending this year.

And if we said that, I apologize.

What we actually are intending to do this year is to slow the rate of growth in investment spending.

And obviously going into '04 we had a big pickup in the investment spending which impacted our expenses and this year we would expect to have less of a pickup.

Now, it's sort of a squishy number to get to.

And in fact what happened is we went into the budget process this year and we talked about a slower growth rate.

People were of course making trade-offs between their businesses usual expenses and their investment expenses, but I think you can see the incremental amount flowing during this quarter if you do the calculation and I would look for that to probably unless, again, folks, you know, switch from a, well, I got an expense save here, let me move it over to the investment spend.

We would look for that pickup not to be nearly as much.

The net, of course, will be less of a hit to the operating expense going forward.

Chuck, do want to add anything?

No, that was well put.

Thank you.

Just conceptually I guess the goal is to get positive operating leverage in every business.

At what point does it make sense to have negative operating leverage in one or two businesses with superior long-term growth?

I'll let Chuck sort of hit on this.

Certainly as we go through the budget process the businesses are looking for positive operating leverage.

When we, as we run the company we'd like to see that, we think it shows some nice health in the businesses.

We would like to see positive operating leverage across the businesses and, of course, given the portfolio of businesses we have and given some of the businesses we have, the CIB, for example, where there could be more market volatility, and there may be some negative operating leverage is best in class, the absolute best it can be.

We obviously, through our portfolio of businesses can look at where it makes sense to put the brake on a little bit more in one business, take the foot off the accelerator.

You know what I'm saying, it's a car analogy, right?

Put the accelerator on in one business, take the foot of the brake.

Whatever.

The car analogy, there we go.

Yeah, I've said a number of times publicly that the hallmark of a well run business is positive operating leverage, and that does not mean that we will have positive operating leverage in every business all the time.

There are times when revenue volatility will outstrip our ability to have variable expenses and there will also be times when we will very consciously invest for longer term and sacrifice a short-term operating leverage for a long-term gain in the franchise.

But we are returning to positive operating leverage for the company as a whole and that's a very good thing and we expect that trend to continue.

In terms of rate positioning when we see the 10Q will you still be hurt a bit from higher interest rates and how much?

Well, if you're asking the question about what the IRE is, I think what you're going to see when you look at the Q is the IRE, we believe, remains pretty manageable, less than I think 2% of the pretax income that we have, so perhaps up a bit from the first, fourth quarter, excuse me, in part due to some of the duration on the mortgages extending but that I think you're going to see again as a percent of earnings it remains pretty manageable.

And last question.

The fed came out recently saying that you can't do big deals.

What's the definition of big?

Well, Mike, the definition of big is in the eye of the beholder.

Everyone would like absolute certainty and clarity in the world.

None of us have that.

There's no definition of significant expansion in the fed's order, and I think that the reality is that I would be surprised if the team brought to me something which was significant as anyone would define it in the short-term, as we focus on the Five Point Plan, and I would be very surprised for me to show up at the fed and say we'd like to do something tomorrow that was, quote, significant.

But it is not something which has a specific dollar amount threshold so that if we're a dollar below it, it's fine, and a dollar above it, it's not fine.

It is not that kind of rules-based approach to the regulatory environment.

Thank you.

Once again to ask any questions you may press star one on your touch-tone phone.

Thank you.

Next question, Jim Rosenberger of Bernstein Investment Research and Management, you may ask your question.

Thank you.

Two small questions.

The first one is, Sallie, do you expect the repositioning costs to continue after the first quarter?

No, we don't.

Okay.

And the second one is on the alternative investments.

Can you remind me what we should consider sort of a normalized run rate on a quarterly basis for that segment?

Yeah, that's a very good question.

We were actually asking ourselves this question over time.

Look, it is a business that by its nature moves around.

I think the best way to probably look at it is to take perhaps a full quarter average at any point in time and look at that and think about that being a more normalized run rate for the business.

But certainly this quarter and last quarter were nice quarters for us, I don't know that I can tell you, okay this is it, and take it out from here.

I think you have to look at this business, as one has to with our trading businesses, for example, on more of a longer term basis.

Thank you.

Thank you.

At this time we're showing no further questions.

Motion to adjourn.

Thank very much, Operator, and thank you everyone on the call for joining us.

Any other questions you have during the course of the day, feel free to call us in Investor Relations, otherwise, this adjourns our call.