花旗銀行 (C) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Citigroup's second-quarter 2005 earnings review featuring Citigroup's CEO Chuck Prince and CFO Sallie Krawcheck. Today's call will be hosted by Art Tildesley, 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. Mr. Tildesley, you may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for our second-quarter 2005 earnings presentation. Chuck will start the call with some opening comments and then Sallie will take you through a presentation that we have available on our website if you haven't downloaded it already to our investor relations link. And then at the conclusion of the presentation both Chuck and Sallie will be available to answer any questions you may have. So with that let me turn it over to Chuck.

Thank you, Art, and thank you all for joining us this morning. We've got a lot to go through so let's get started. I've got three things I'd like to talk with you about -- one is the second-quarter operating results and how our business has performed; the second is progress on some of our legal and regulatory matters and how we're resolving those; and third, some important strategic actions we took during the quarter.

But before I start, most of you were on the call last Thursday; but for any of you who were not, I just wanted to spend a moment again to say thank you to Bob Willumstad for his great career at Citigroup. He's been a dear friend and colleague for almost 20 years and has made enormous contributions to Citigroup. We certainly wish him well in all his future endeavors and know he will be successful but he will be missed here.

Now back to the second quarter. The environment that we've been seeing has been a very difficult one in capital markets, especially in April and May, come back in June; a flattening yield curve, which contributes to spread compression, dampened client trading activity; a temporary spike in bankruptcies due to the changes in the U.S. bankruptcy legislation; a continued high level of prepayments in cards, especially North American cards; and increased competition across products and geographies. And with all of these difficulties and challenges we still generated income of over $5 billion and a return on equity of 18.5%.

Now I'd like to be very candid and straightforward about the things that are working not so well and the things that are working well in the organization right now. The things that are working not so well, we start with fixed income markets declined 28% and, as I said, that reflects a very difficult environment we had especially in April and May. Secondly, things not working so well are the continued weakness in revenues in North American cards as we felt the impact of spread compression and continuing high payment rates.

On the positive side international consumer has done very, very well and GTS, our transaction services business, actually had a record revenue quarter in the second quarter. On a regional basis, we're doing quite well outside the United States. For revenue and income on the consumer side Mexico was up 25% and 57% revenue and income; Latin America generally up 26% and 48%; Asia up 18% and 22%; and even Japan up 2% and 28% -- 2% revenue, 28% net income. And so the international consumer side is actually doing very, very well.

We're also pleased with the growth in customer volumes across our businesses. Private bank client business volumes outside of Japan rose 13% including the 27% growth in the United States. For our transaction services business, which, as I said, doing very well, assets under control of $8 trillion were up 14% and liability balances increased 25%. In North America retail banking average deposits and loans grew 6% and 20% respectively and internationally retail banking deposits and loans increased 9% and 19%. Our mortgage originations were up 28% on a sequential basis and the sales momentum in our cards business -- North American card purchase sales are up 9% year-over-year and 13% on a sequential basis. And again, in the international cards we see purchase sales up 17% on a year-over-year basis.

Now I mentioned CIB revenues were sharply lower because of the fixed income market activity, but we also had some positive things there. The equity markets area, an area where we've been investing both in people and in targeted acquisitions, demonstrated particularly strong performance in the quarter with revenues 40% higher than the second quarter of '04. It's our 15th consecutive quarter as the number one global debt and equity underwriter and, importantly, our share -- our market share has actually increased both in the U.S. and on a global basis versus the second quarter of '04 and versus the first quarter of '05 and we continue to make progress on our derivative activities.

And we've even noted an improvement in our M&A with global announced year-to-date rank improving to number six from number eight in the first quarter and global completed year-to-date ranking of number two up from number four in the second quarter of last year. So good momentum on the M&A side, although obviously with still some work to do.

Our overall credit experience continues to be very good. Global consumer loss rates, excluding commercial markets, declined 5 basis points on a sequential basis even with the uptick in U.S. bankruptcies; and corporate cash basis loans declined 8% sequentially and are down over 60% from their peak in the second quarter of '03.

Now let me turn from an overview of the results this quarter -- Sallie will go through them in some detail in a moment -- to my second topic which is resolving the problems of the past. We resolved a number of matters in the second quarter, I'm very pleased with that, and I'm just as pleased that we did not incur any additional P&L impact from any of these resolutions. We resolved the large Enron matter in June. In May we resolved the transfer agency matter with the SEC. And just recently we've announced the resolution of the UK FSA matter relating to the MTS trade from last August. We've also had a couple of encouraging developments, although early, in the Parmalat cases in New York and New Jersey. So in terms of under the heading of "clearing the decks and putting the problems of the past behind us", I think the second quarter was really an exceptionally good quarter for us.

My third topic, before I turn it over to Sallie, is to talk a little bit about how we continue to invest to expand our leading franchises. We've continued to open branches and on an organic basis opened 73 consumer finance offices in this quarter and 26 retail bank branches and in addition to that, of course, we added some new branches in the Philippines through the acquisition of Insular Savings Bank there. We're continuing to invest in advertising and marketing spend to support our global brand and our new product offerings in the consumer and in wealth management.

In partnerships with the cards business we've entered into a long-term deal with the Federated department stores -- you all saw that, of course. And we've launched cobranded credit cards with Cespa in Spain, Eurotel in the Czech Republic and MTV in Japan. And we obviously announced the sale of our asset management business and, importantly for the future; we are being paid for that sale partly in the acquisition of Legg Mason's retail brokerage business. We'll be adding about 1,350 financial advisors and 127 branches to the Global Wealth Management platform and the progress on that announced transaction is going very, very well.

We also closed several divestitures in the quarter. On May 2nd we closed the sale of City Financial's U.S. manufactured housing portfolio which we announced in the first quarter; and on June 30th we closed the sale of our remaining equipment financed portfolio in Europe, the first tranche of which was sold in the first quarter. And lastly, as you all know, on July 1st we closed the sale of our life insurance and annuity operations to MetLife.

So overall, I would say that the quarter had some very positive elements to it and some weaknesses that we're keenly aware of and working on and will be addressing as we go forward during the balance of the year. Now with that let me turn it over to Sallie for a more detailed review of the financials and then I'll be back with Sallie to answer questions. Thanks.

Thank you, Chuck, and good morning to everyone. Thank you for joining us so early this morning, we appreciate it. I'm going to go ahead and start with the docs that you should have received or that you can get up on the website. And I'm going to turn first to the first page where I've got the summary income statement which we've laid out for you here on both a GAAP basis as well as before last year's litigation charge and gain on the sale of Samba. And as I go through it I will point out to you where it's GAAP and where it's those two.

Net revenues for the quarter were $20.2 billion for us. Recall this is on an operating basis, all of the results of our discontinued operations, Travelers life annuity and the asset management business, are one line toward the middle of the income statement under disc ops. And so the net revenue does not include the revenues that they generated in the quarter. That number is down 3% on a GAAP basis from $20.9 billion last year, but up 2% if we exclude the Samba gain. You'll recall that was $756 million, after-tax $1.17 billion pretax in last year's second quarter.

Operating expenses were $11 billion, down 40% on a GAAP basis. The charge last year -- the litigation reserve was 7.9 billion pretax, 4.95 after-tax. Operating expenses adjusting for that were up 7%. On the next line you can see the credit losses were up 12% for us over last year. The tailwind that we had over the course of last year has now moderated and has turned into a bit of a headwind as you can see here.

Income from continuing operations 4.7 billion, down 7% ex Samba and the litigation charge. And net income was 5.073 billion compared to the 1.1 on a GAAP basis or down 4% from the 5.3 on an adjusted basis. Diluted EPS $0.91 per share on an operating -- on a continuing ops basis and diluted EPS on a GAAP basis at $0.97 per share, again compared to ex Samba and ex litigation to $1.02 per share in last year's second quarter. The return on equity remains high, not as high as it's been in some of our prior quarters, at 18.4%.

Let me then turn to the second page where I'm going to hit some of the highlights for the quarter. As Chuck mentioned, it was a challenging but not disastrous capital market environment for us and for the industry. Beyond that, which of course you read about quite a bit in the newspapers through the course of last quarter on the environment, we saw pressure from rising short-term rates in a flattening yield curve. I should actually say flattening yield curves because we saw those across the world, around the world and across our customer businesses.

The credit environment, which has been improving, is best described this quarter -- we would best describe it as being a stable credit environment and having had the reserve releases last year and in having some builds that I will walk you through in a bit, we had a pretax plan (ph) at $714 million on our general reserve release and build line. On top of this, as Chuck mentioned, we witnessed a spike in bankruptcy filings driven by the U.S. legislation which added, we estimate, approximately $175 million to credit costs for our North American cards business in the quarter. Now despite this North American cards grew 1% while, again as Chuck mentioned, the fixed income business was down quite a bit for us this quarter.

The bright spots are record quarterly revenues and net income in transaction services which continues to be a very good performer for us and strong results in our equity markets business. Also bright -- the international consumer revenues were up 10%. That's in the way that we define international. If we were to add Mexico to that, which is in our North American business as we reported, it would be up 13% and we saw growth in customer balances.

Capital management -- Chuck has been through these, so I will let you look at it as well as the resolution of legal and regulatory matters during the course of the quarter. I would just add on the bottom of the sheet that we got back in the market in a bigger way in buying back our own shares having repurchased 42 million shares this quarter or just under $2 billion worth of our shares outstanding.

Page 3 on the economic environment -- on this page we attempt to characterize for you, as best one can in four slides, the rate and economic environment that our businesses are seeing. I mentioned here on the top left hand slide the challenging yield curve environment that we're seeing and this one's interesting to me because we know this, but to look at the yield curves as they exist in many of our important markets, the U.S., Mexico, South Korea and the UK, one can really see the flatness that is a global phenomenon.

I also mentioned earlier the spike in U.S. bankruptcy filings. As you can see, as we started the year bankruptcy filings in the U.S. were running below where they were in 2003 and 2004, during the course of April and so on spiked up to about 12% over last year, by June were running up 6% over last year. And we would expect some moderation in these rates is our best estimate before perhaps another spike up before the bankruptcy law goes through. On the positive side on the economy the unemployment rates in many important markets were pretty stable and consumer confidence, while having some volatility, was stable to good as well.

Page 4 -- with that as a backdrop I'm going to turn to a snapshot of the revenues for our Company. Transaction services leads the way here for us at 21% up based on higher balances, increased activity and the positive impact as that business sees a rising short-term interest rate. Our retail business was up in revenues 8% in total. That breaks into 6% in North America, 11% overseas driven by loans increasing 19% and deposits up 9%. Smith Barney up 4% -- you'll see in a bit that their recurring revenues continue to do quite well while the transactional revenue shows some weakness.

Consumer finance up revenues 1% in total, down 1% in the United States in North America, up 5% overseas. I'll talk about that in greater detail in a minute. Cost revenue was flat, down 3% in North America though up 7% on a net credit margin basis which we've talked to you about before and it's the way that Marge and her team, Steve Freiberg, etc., look at and manage the business. The international card revenues were up 11%. Private banks down 10% -- this was wholly driven by Japan and capital markets and banking down 12% with fixed income revenues down 28% in the quarter.

Turning to page 5 then, we'd like to give you a bit more detail on fixed income on this slide given its importance to our results in the quarter. I would characterize the pressure in the quarter on fixed income as being about half driven by interest rate movements and the flattening of the yield curve for which the business was not well positioned and the rest from the dislocation in the credit markets, lower trading flows and the outside volatility. And you can see this in the revenue decrease table which we've broken out for you over here on the right with interest rate products, which are our largest business within fixed income, down 55%.

Credit products, which is actually typically our second largest business was not this quarter, down 57%; securitized products also under some pressure while FX and commodities did quite well during the course of the quarter. So a mixed bag, but certainly on the whole not a positive result.

For the quarter, to give you a feel for it, it started off very poorly. April fixed income revenues were down more than 60% over the first-quarter monthly average. May then rebounded up more than 60% over April and June was up more than 80% again. Let me remain on revenues and I wanted to take the opportunity to highlight and turn to our consumer finance business. Last quarter we highlighted our retail banking business and this quarter we thought it was important for us to talk to you a little bit about what we're doing in the U.S. where we are consciously giving up revenue because of the risk we see in the market and the lower risk profile we've taken in that business whereas overseas this has been an important growth initiative for us and we're building for future revenue growth.

So if we go to the left-hand side of the chart, here you see our North American business and what we have here are real estate secured loans, which are about 65% of the loan portfolio in North America, are $53 billion -- still up 6% over the prior year but you can see here declining sequentially. Revenues at $1.8 billion are down 1%. Now if you look at why this is happening, a good part of the explanation for the business and the business' market share losses is the consumer finance business is not participating in the riskiest products within real estate lending.

Interest only products, which we estimate were 27% of '04 originations, are a business in which consumer finance does not participate. Aggressive hybrid arms, those that start at sort of 1% rate and then boost up after three years, are also a product which the North American business does not participate. And the negative amortization products as well; again a product where they have chosen not participate.

The business really is a fixed rate amortizing real estate secured business with 89% of our portfolio fixed rate and the rest of it variable-rate but only for the highest FICO customers and the fixed rate at 89% of our portfolio compares to 36% for the industry. But in contrast outside of the U.S. this is a business where we have been investing quite aggressively for growth and you see here the bars here are the branches that we have in how we define international which is ex Mexico, again that's in North America, and we've also shown it to you ex Japan here to take up some of the noise that's going on as you're all quite aware I'm sure. We've had credit issues that we've been working with in Japan and so have consciously slowed growth in that portfolio.

We've opened up 188 branches in the past year and in the past quarter we've opened up 49 branches. This is in addition to 16 that we've opened in Mexico and we have opened 65 automated loan machines in Japan. In the quarter we entered the Russian market and year-to-date we have entered Finland, Indonesia and Australia. So as you look at this we then have the branches that have been increasing, average net receivables have been growing as well which is the bar on the chart up to $12 billion. So branches up 40%, average net receivables up 20% and revenues up 13% and, of course, as we grow the business one follows the other. We're very pleased with the progress there.

Continuing down the income statement we go to page 7 and we turn to expenses. Expenses, as I mentioned, this quarter were $11 billion. This compares on a GAAP basis to 18.2 billion last year but on the basis adjusted for the litigation charge 10.3 billion. It's up 7% over the second quarter ex the charges, but note that we have had pretty stable operating expenses over the past three quarters. Now of the increase, the 7%, 3 percentage points of it is branch expansion, 135 branches and ALMs in the course of the quarter, some incremental advertising and marketing targeted stuff on technology. 3% of the increase is acquisitions and FX, which of course we should see in revenues although we don't see all of the FX in the revenue, and 1% is what we term as business as usual which should follow along with revenue growth.

Page 8 I'll turn to to start with the credit quality. The consumer credit environment I would characterize -- we would characterize as pretty stable with net credit losses flattening out and 90 days past due continuing to decline somewhat. Although I wanted to talk a bit about the North American bankruptcies, and I would tell you it's somewhat of an art to calculate what the impact is, but we estimate that the increase bankruptcy in the U.S. added, as I said before, about $175 million to U.S. card NPLs and just about 5 million to consumer finance, which, as I pointed out, is a more real estate secured portfolio.

For North American cards this took the NPL up by we estimate 50 basis points to 5.71%. And I would note that we write off our bankruptcies within 10 days of notification which is more conservative or maybe aggressive, depending on how you talk about it, than the industry where we believe a lot of folks are writing it off after 30 and 60 days. So we're seeing a lot of this coming through here for our cards business in the second quarter.

On the loan loss reserves in consumer you should also be aware that we added $127 million to our reserves at our German consumer bank business as we beefed up our bankruptcy reserve in that market as we had more experience developed in the wake of some bankruptcy law changes they had there a few years ago. Beyond that I would say the consumer credit world looks fine with the exception of some weakness in the U.K. and Spain.

Page 9 turns to corporate credit quality and that too has been stable to a bit better as the portfolio remained in net recoveries and cash basis loans continued their decline. Here as well we increased reserves somewhat; we increased reserves by $100 million which is wholly due to increases in our unfunded commitments in the CIB business.

Page 10 then pulls together the drivers of the change in net income this quarter. You may recall this slide, we've used it a couple times now, and the way to read it is that the blue or above the line represents a benefit or a help to net income while the green or below the line represents a headwind so to speak. And as you work your way down through here you can see that the -- on the balance sheet we've had good growth in average assets and loans, nice growth in deposits and that we translated that 10% or 12% growth into 20% interest revenue growth in the quarter.

What we then saw is the impact from the increasing interest rates of some actions that we've taken take the cost of funds up 74%. Now I'm going to ask you to remember here that we are not -- Citigroup overall is not a traditional bank and we have a large institutional trading business and based on short, as of the course of the industry, we've seen exactly this type of increase and more as the other broker-dealers as they reported. In addition we closed down some interest rate gaps in the past year and extended our debt maturity taking this number up. And the combination of those two leads to a 6% decline in net interest margin. So that's about half of our revenue.

The other half of our revenues, as you can see, were up 12% or up $1.1 billion. And the combination of these two led to a 2% increase in revenues. You may remember that last quarter we reported a 6% increase in revenues versus 2% this year and the decline from the 6% to the 2% is wholly explained by the weakness in the capital markets and banking business. I touched on expenses before up 7%, again on a non-charge basis the provisions, again, providing a bit of a headwind for us as we turn the corner on that and all these combine to get to the net income number as discussed before down 7%.

Page 11, second quarter income, I will just point you to this page and let you look at it at your leisure. It shows the breakdown by the big businesses as we report them as well as the pie charts which show you by region and by product how the Company falls out. I'm going to skip on then to page 12 where we show net income growth on a bit more granular basis by the product view. And here we see as we go down on the left-hand side Smith Barney up 13% in the quarter, transaction services up 10%. Now for those of you who remember back to the 21% revenue increase, this looks a little bit weak in comparison to that; but do recall in last year's second quarter there was a $51 million after-tax loan loss reserve release in that line, so quite a strong performance in the underlying business.

In consumer finance net income in North America, which is the lightly shaded bar, up 4% but up 23% internationally. This is even exceeded by the cards business -- the international cards business down below up 27% as the investments we've made there appear to be paying off. Cards in North America up 1%. Retail banking, you can see a good performance in North America while you see the impact of the German bankruptcy increase on our international banking businesses. Capital markets and banking and private bank bring up the rear for the reasons we've talked about before.

The regional view over on the right is an interesting one. In Latin America -- and what we've done here is we've broken out the region and we've broken out the consumer and corporate businesses in the region for you. Latin America we continue to see, as we have for the past several quarters, a benign economic environment which is tougher -- can be tougher for our CIB businesses which haven't seen the trading opportunities they have in the past, up 5%, but is very helpful for our consumer businesses with each of the consumer businesses all of which are represented there showing very good double-digit growth on the revenue side.

Mexico, again, a split between consumer and the corporate business -- the consumer business is going gangbusters there while the flat yield curve and loan loss reserves of 137 million after-tax last year put pressure on the corporate businesses. North America consumer pressure by the North American cards business and consumer finance which we've talked about, the CIB business down 35% and Global Wealth Management in the U.S. up 12, so a good result there. Asia up 22% with our cards business up 42% and, again, CIB having a tough result, flat yield curve and facing $31 million last year of after-tax loan loss reserve releases.

Japan up 28% on the consumer side. This was driven in good part by a rebound in our consumer finance business in that market as the team has done I think a great job of working its way to the credit issues there, but the corporate business suffered some weakness. And then in the EMEA, the German bankruptcy, you can see its impact on the consumer businesses. The corporate business up 18% and actually ex Samba a record quarter for our business -- our corporate businesses in EMEA.

Let's turn to the businesses themselves. On page 13 we go to the cards business. Some good news and some tougher news here. Glad to see -- very good to see purchase sales in that business, which is the customers who are out using our cards and buying things, up 9%, interestingly above fourth-quarter sales levels as some of our new products -- new awards programs seem to be doing quite well. We also saw, not unexpectedly given their conductivity, higher interchange results in the course of the quarter. But we still fought a headwind, as Chuck mentioned, from higher payment rates in this business and our payment rates are running at 18.9% in the quarter versus 17.5% in the second quarter of last year.

As the short-term rates have gone up and as the business has taken some actions to lengthen the maturity of its funding we have seen spread compression and lower risk-based fees which one expects to see in a good economy. Thus the decline in revenues but the favorable credit environment still was there despite the spike in bankruptcy filings which led to a 7% increase in net credit margin. However swings in the loan loss reserves dampened net income growth to 1%. I would mention Mexico which again is reported within this line, with 63% growth in managed receivables, a very active and dynamic business. The International purchase sales up 17%, end of period loans up 16% and we saw a return to account growth. As attrition declined we had seen some pressure there as we had integrated the core end business and worked through some of the inactive accounts that were there. Credit remains very good and we saw good growth in Australia, India, Korea, Taiwan, Russia, Greece and Brazil.

Moving on to the consumer finance business, I've talked with you about this so I'll just let you know this page is here and note that we opened 16 branches in Mexico this quarter and 71 over the past year, internationally 54 branches and 65 ALMs, those automated loan machines in Japan. Take 15 (ph) retail banking -- revenues up 6%, net income up 13%, good growth in deposits, good growth in loans, the commercial business actually performing quite well underlying that 29% decline that you see there, core loans up 15% but it has a liquidating portfolio and we sold some businesses, so suffering from some very tough comparisons. Overall in the whole business I would note $68 million in loan loss reserve releases last year on an after-tax basis.

International net interest revenue up 14%, good volume growth, improved spreads on deposits. I mentioned the credit cost in Germany for us, but the underlying credit is in good shape.

Over to CIB businesses where, again, two stories here. I think the first story one's eye goes to is in the fixed-income businesses which we talked about, but you can also see the strong performance in equity markets -- revenues up 40% with particular strength in derivatives and equity finance which is good to see given the investments we've made in those businesses. And global transaction services -- really strength across the board, very good organic growth across the board in that business and, as I told you last quarter -- I won't say again this quarter -- the pipeline for that business remains at a record level.

Global Wealth Management, net revenues up 4%, the tail I guess of two revenue streams, transactional revenue down 5%, fee-based revenues up 12%. Remaining in net positive flows for the quarter and we saw some decline in legal fees in the course of the quarter as new cases are declining from the prior year. Private bank results, again, reflect the wind down in Japan. Ex Japan net revenues is up 5%, net income down 4% with the expenses that break down the relationship between the two of those reflecting some front office expansion. But good client business volumes and really very good client business volumes in the United States. And in alternative investments, another good quarter for that group with strong private equity realized gains and unrealized gains and client revenues doing quite well.

Before I turn I think to the last page or couple of pages, a word on our corporate line. As we discussed a couple of quarters ago, we're now seeing the impact of the higher short-term rates and a flatter yield curve on corporate treasury earnings leading to a decline in those results over last year.

On page 19 we get to our returns on capital which all remain very good on both a return on risk capital and a return on an invested capital basis. The final page I'm going to talk to is capital discipline. I will note we have a last page here, page 21, that does break down for you, as we've been doing, some of the items in the quarter that you should be aware of such as loan loss reserve, etc. -- I guess we'd call it our significant items page.

In terms of the capital, we now have 119.5 billion in stockholder's equity -- interest preferred securities, a strong tier 1 capital ratio of 8.6%. In terms of common dividends we paid out 2.3 billion this quarter, repurchased 41.8 million shares for a total of just under $2 billion as we return to the market.

So before we go to questions, I guess to sum up, as Chuck did, the Company had a tough quarter in two of its very important businesses. Fixed-income suffered from the tough environment and we certainly are disappointed in those results. North America cards this quarter dealt with the impact of higher bankruptcies as well as continues to feel the impacts of the higher payment rates and spread compressions. Those numbers as well came in somewhat short. However, as managers looking at the underlying health of the businesses and looking past the noise of the charges and the gain from last year and the movements that we see in the loan loss reserves, we're pleased with what we see.

The Company, as I showed you, is maintaining its expense discipline as shown in the quarterly expense progression. And the CIB, two businesses that we've been investing in equities and GTS, showed strong performance and for equities it was in a less than robust environment. In our Global Wealth Management businesses it's certainly been a tough transactional environment, but our very talented financial consultants and bankers continue to grow assets and recurring revenues.

And finally, in our international consumer businesses, which I think are really the stars here, they continue to perform well with double-digit revenue growth which they've leveraged to 23% net income growth in international consumer finance and 27% net income growth in international cards. So with that let me finish up here and open it up for any of your questions.

Okay, operator. We're ready to begin questions and answers.

(OPERATOR INSTRUCTIONS). John McDonald.

Banc of America Securities. Wondering if you still think it's realistic to expect positive operating leverage for the year given the challenging revenue environment this quarter.

Thanks, John. The short answer is obviously if you have a 28% downdraft in one of your big businesses that's a pretty strong tide against which to swim. But assuming we don't have that on an ongoing basis, I still feel that that is a goal that we can reach, should reach and that we're working actively to reach.

Thanks, Chuck. Just a follow-up question for Sallie. On the corporate other loss, just wondering can you give a little more color? Could we operate at this level, the $-245 billion loss, is that something you can operate at if the yield curve stays flat, Sallie?

Good morning, John. In terms of I guess a little bit more color on the treasury, I think in part it depends on what your forecast is going forward from here. As we look at what the impact was, as I mentioned, it was the impact of the rates was about half of the decline in the move to lock in longer-term funding. We did have some increased balances that we were funding so that was part of it and we did have a little bit of FX. And then on top that we did see some impact that was not all treasury from some higher taxes that are being held at corporate where we didn't have enough information to put to that on the businesses as well as some O&T (ph) projects.

So, I think if you are looking -- if you have those items in front of you and you're thinking about what the environment would be, certainly if we were to see a flat yield curve the result would not get any better. Certainly if we were to see increasing rates that would have pressure on it as well. So I think we talked about this maybe a couple of quarters ago. It's hard for me to give you the rate at which it should operate, but I wouldn't expect to see anything better until the interest rate environment becomes more favorable.

And are you reconsidering a hedging strategy at all or is that just something you're constantly looking at?

In terms of a hedging strategy, as we've talked about before, we've hedged some things on the income statement which we think is important for us as well as on the shareholder's equity we hedged the excess of the capital ratios. And so we're sort of fine with that. In terms of if you're asking the question about opening or closing gaps in the quarter, we have closed down a lot of gaps -- not just in our treasury business but, as I mentioned, across our cards business and our consumer businesses.

And given the flatness of the yield curve there's not a lot of opportunity or pay off for opening up those gaps. And so instead we've taken the opportunity at the Company to lengthen out the maturity of some of our debt over the past few years and into this year and we see that as a better opportunity than to try to chase some opening gaps which may not be the right thing to do at this stage.

Okay. One more quick question just on the pace of buybacks. Can you give us any color on that? Last quarter you announced a buyback that would take place over an 18-month period. Is this quarter kind of typical of what we should see and what will drive the pace of buybacks?

John, nothing happened this quarter that would change our outlook on that. Clearly if you take the 15 billion and you divide by the time outstanding you'd say you might have to step up in order to get there. But clearly we have proceeds coming in from the TL&A transaction this quarter. And so what we would want to do is pretty closely match capital generation with share buyback. So we still feel very good about the buyback.

Okay, thanks.

Guy Moszkowski.

Merrill Lynch. You alluded to the -- about 3 percentage points of this 7% operating expense growth coming from acquisitions and FX. Can you give us some sense for, at least in terms of the acquisition, what percentage of the net revenue growth ex Samba's 2% came from acquisitions?

Yes, Guy, in terms of on the revenue side we have about a -- well it looks like a little under a point of it being from acquisitions. It's clearly something that's moved down over the period of time as we sort of lapsed in some strong acquisitions.

Sure, thanks. Another question now on the fixed income side. You did, as you pointed out, have a 28% decline versus year ago in fixed income. Your peer group looks to us the guys who reported for a May quarter had about a 10% aggregate decline in fixed income. Have you tried to benchmark yourselves against those results to get some sense of what was different about Citi? You alluded to positioning, could it have been that?

Interesting question. As you can imagine, Guy, we obsessively and compulsively and constantly benchmark ourselves against the others. I think as soon as they report, probably two minutes later we have the results out and are looking at them. And you are right -- on the fixed income side we did under perform. I will note it was nice to see that in the equities business we did outperform so there were some glimmers as well. And it's hard because they don't give out, as we don't give out, an enormous amount of detail for where within the businesses did we -- did we under perform.

My guess would be -- we all saw the same type of thing in credit, so it would be perhaps mixed. But also, as I mentioned, about half of the downdraft I would characterize as being driven by the interest rate movements in the quarter which by its nature then implies that we were not positioned for the decline in the long-term rates and the flattening of the yield curve. And so my guess would be it would likely be driven in good part by that.

Okay, fair enough. And then finally a question on North American retail. You went to some length to describe the fact that in consumer finance you don't have any interest only or negative AM (ph) or teaser ARM type mortgage products; how about in North America retail? Can you give us a sense for what percentage of your mortgage loan outstanding might be that type of product?

In terms of on our prime portfolio, Guy, which you see in our North American retail business prime home finance, we have a higher FICO -- the average FICO is about 733. We don't do a lot of those crazy loans; for example the negative amortizing loans which, as I understand, is about 25% of California originations, we do not do and so we are not in that part of the market. We do interest only there. I mentioned in consumer finance that we don't do that, but for our more upscale clientele, for example our Smith Barney clientele, we do the interest only's and those run at about a quarter of the portfolio for us.

So all in all we -- we're keeping a very close eye on what the guys and gals are saying out of some of the stuff that -- or all of the stuff that you've been reading about in the newspapers in terms of being risk and we obviously have a very close eye on it.

Okay, great. Thank you very much.

Mike Mayo.

Prudential Equity Group. Just a follow-up on the cost of funds. Each quarter I ask the same question. When I stock rank the banks it looks like you guys get hurt the most from higher interest rates, so that raises the question are you guys sitting on your hands a little too much or is there some structural problem with your funding?

It's an interesting question, Mike, and I don't see -- you and I should probably chat because I've seen some of the stuff you put out. But when I look at the results that we've posted on our cost of funds versus what we're seeing out there for the competitors, I haven't seen that we look any worse. We're sort of in there with the rest of them. I know that a lot of folks talk about being asset sensitive, we continue to be liability sensitive although not at the same rate that we were certainly in the first quarter.

But do we have a problem? Absolutely not. I think you're seeing a mix of business issue with the CIB and those types of businesses funding short-term. I think you've seen us lengthening out our maturities and, even with all that, as I look at the numbers I don't see that we are performing to any great degree differently from other folks in these types of environments.

Earlier this year you said you feel okay with the low-end consensus which then was around 420, but that was before the announcement of some of your asset sales. Can you give an update on how you feel about earnings for this year or for next year?

Yes, Mike. You're also going to remember that earlier this year I had a onetime special on earnings guidance, it was get it done (ph). And so I promised you then that I was not going to give further earnings guidance until I keep my promise on that. I would suggest you could take a look and I guess detract out the things that we've sold and add back in some things, but I will decline to give further guidance.

And then lastly, you guys mention the environment a lot and you say you're pleased with some of the underlying trends, but in terms of the stock price performance you've underperformed many of the peer segments where you operate. I guess this is for you, Chuck, if you're still there -- since you became CEO your stock is flat whereas almost every segment where you operate in the stocks are up 28% or more. So I'm just wondering, how are you going to judge the success of the firm looking out a year or two or what is the Board saying to you in light of that?

Mike, thanks for the question. Yes, I am still here. I think the right way to think about the stock price is on a P/E ratio standpoint, and as we -- we look at this very carefully as well -- if you look at our P/E ratio compared to other firms, it feels to me as if we're pretty much in the middle, sometimes a little less. And typically it's a little less when we have some kind of a regulatory hiccup. I've gone over with Art very carefully the last couple of years and when our stock price tends to gap negative to others it's because there's some regulatory hiccup out there.

And so we're very focused not only on growing the business but on making sure that we don't have those regulatory hiccups. And then from there we've got to grow our businesses and we've got to grow the businesses that are in front of the train which are cards and fixed income as well as the smaller wallet size businesses like international consumer and GTS. But coming back to the basic part of your question, I think you start with the P/E ratio and you make sure that you don't stumble on the regulatory front.

I guess the question is do you think you spend too much effort on avoiding problems as opposed to generating favorable risk-adjusted growth?

Well, I think it's the kind of question that's a very legitimate one to ask, Mike. That's a day-by-day question. You don't try to go all the way one way or all the way the other. It's clear that if we were to throw one or the other to the wind we would be doing a bad job and so I take your question to be is the balance right? I think right now the balance is right. The issues that we're dealing with this quarter that have been highlighted on the negative side don't really deal with overly cautious risk issues. But it's a day-by-day calculation and I expect that there will be times when we lean a little more one way and a little more the other.

Alright, thank you.

Glenn Schorr.

UBS. Sallie, comments on not participating on the riskiest parts of CF&A -- I guess the question I have is is it because there's no -- in other words ideally you'd like to originate and disseminate, right? So is there no secondary market for that? Is there a difficult in hedging or is it a function of not -- of being worried that the underwriting of those products can eventually catch up to you?

In terms of CF&A, we do hold the loans on our balance sheet so we're not actively out there selling them or securitizing them. I'm going to give you a very Pollyanna answer to this question but it is the truth which is that the reason we don't do it is because we don't believe that these are the right products for those customers. The variable-rate product is right for some customers, but for those who have less experience with their finances, with managing their finances, with taking out big loans they might not want to have one. They might not realize what a rising rate environment may entail. So you go from having that view on the variable-rate to sort of taking it down to some of their racier products and it's just not something that we feel like we should be doing for those customers in that segment of the market.

Fair enough and I agree. In cards, given the charge that you put up on slide 3, it's certainly hopeful that -- and your accounting policies that the bankruptcy issue actually comes in as early as next quarter. The question is you didn't mention really minimum payment -- and I know it's impossible to properly quantify it but I'll ask you anyway. Is there any way to quantify the impact and/or timing of minimum payment changes in cards?

It may be impossible to quantify it, but of course we have worked very hard to do it. We expect to see -- we have put in the minimum payment across our cards portfolio. We are putting in -- we've put in the positive amortization in portions of the card portfolio and we'll have that fully rolled out in the fourth quarter of this year. And our estimate -- as you say, it's a tough thing to estimate -- is that it's not going to be in the fourth quarter hundreds of millions of dollars, but that it's going to be some more sort of quote unquote manageable number for which we believe we are at this stage fully reserved. As we get into next year, though, as we think about the business, we do expect it to be hundreds of millions of dollars. And clearly the loan loss reserves, as we put the loans on the books, we'll need to reflect that.

Okay, Sallie, thanks very much.

Jason Goldberg.

Lehman Brothers. Chuck, I guess in your remarks you mentioned you're kind of addressing weaknesses in certain businesses. I guess with respect to fixed income markets are there particular changes you want to make to the business so that if this type of environment repeats itself results aren't I guess down as much or you're comfortable there? And then secondly, just maybe an update in terms of where you stand with respect to North American card initiatives in order to combat spread compression, higher prepayment rates?

I'll take them in the order you asked them. In terms of fixed income, I think there are two issues there. One is do you have a bad trading quarter or not and that's not a fixed issue, that's a you can't win every hand of poker issue and I wouldn't try to second-guess how the team that's running that does that on a quarter-by-quarter basis. I think that on a longer-term sense what we have to be careful of in fixed income is to make sure that we are positioned for the growth of new products. Like every business traditional products tend to wane in terms of their profitability and their market share and as new products come up.

And there I want to -- so the issue for me on fixed income is making sure that we're investing in a way so that as new products grow, whether it's in the commodity space or in some of the less traditional structured products areas, that we're actively growing the business and I'm looking there at market share issues as well as making sure that we reduce our costs on the more traditional products.

In terms of credit cards, there are some basic questions. Unlike say American Express we earn a fair amount of our money from balances and we've seen balances for the industry come down as home equity loans have taken share away from those balances and the question really is whether or not those balances come back at some point or whether or not there's been a secular shift in terms of balance growth for the card industry as a whole. And that's something we're looking very carefully at in terms of how we invest and how we grow our businesses.

You see that the purchase sales volume is actually growing nicely. It's really the high prepayment rate combined with the cost of funds that's squeezing the North American cards business. So I think trying to decide how best to position that business for a future in which balances tend to come back or in which balances don't come back is really the question for the North American cards business. I would say though that we do manage our cards business on a global basis, not just in North America basis. We do have a global cards business unlike almost everybody else and so we can look at our business on that basis not just in one pocket and obviously we're investing heavily and growing smartly our international cards business.

Let me -- if I might, Chuck (inaudible). Revenues, as you can see, in the North American cards business were down. I wouldn't presume -- I would not presume to tell you all how to analyze or think about or judge the business, but I can tell you that margin stays, as we've mentioned, manage it on a net credit margin basis, they believe it's the right way to manage a credit intensive business. And of course the higher payment rates, which are depressing to revenues, are in fact good for credit. It's obvious, right? Which is people are paying you back, you're not -- you're getting your money back so you don't have poor credit.

And so because of the interconnectivity between rates, between payment rates, etc., they look at it on an NCN (ph) basis. Regardless the bottom line is -- if you do that you have the bankruptcy then and you have the net income which is not quite as strong. But with the combination of that and the bankruptcies is not a particularly awful, awful result for the North American cards business in the quarter.

I would say -- I think one of perhaps the more interesting and dynamic things that's happening at this Company is the growth in our Mexican cards business. I was down there a few months ago and what's happening, Chuck mentioned, managing on a global basis -- it is a thriving business in good part because much of the expertise that we have grown in the North American cards business is being exported to Mexico.

So a lot of the technology we have, a lot of the consumer behavioral stuff we have -- we're bringing folks up, we're putting folks down. And so what they are seeing is, yes, it's a fast-growing cards business but gaining on the competition very much there by having a dynamic product introduction agenda. And so I think things are very good there.

That's helpful. And then just secondly, on the growth driver slide with cost of funds down 74%, can you help us kind of discern what is kind tied to CIB and what's outside of CIB? And then secondly, just maybe more color in terms of -- you mentioned you've taken some balance sheet actions I guess to manage rate risks. Maybe just some more color on what you've done there?

In terms of the balance sheet action against rate risk, as I mentioned, we had closed our gap significantly during the course of the quarter and I don't think we're going to go any further on that. In terms of -- I'm looking here for our debt issuance -- we've extended out the weighted average maturity of our debt. It was back in the early sort of 2001-2002 period when the weighted average issuance maturity was in the 4.5 year type of time range to about 9 years. So we were doing that to take advantage of not only (ph) the flatter yield curve.

In terms of breakdown between the consumer business and the CIB business, you faded in and out a little bit, so I think that's what you're asking in terms of the cost of funds. We're seeing it -- we're seeing a bit more of an increase in the cost of funds in our CIB businesses than we are in the consumer businesses, but we don't break out the details for you completely.

Thank you.

(OPERATOR INSTRUCTIONS). Diane Merdian.

KBW. I have two questions, the first is on expenses in the corporate and investment bank and the second is on the bankruptcy losses in cards. On the corporate and investment bank sequentially your total expenses declined by about $300 million, but if I understood right in the first quarter I think there was about $200 million of repositioning costs in the first quarter. So it seems like there was ex the repositioning cost, a pretty small decline sequentially in costs relative to a $900 million revenue decline. So I'm curious if there was anything special in the expense number in the second quarter?

In terms of the expenses in the second quarter, I don't think there was anything special there. As I said, we sort of had stability and so, as you mentioned, there was a decline from the repositioning charge. But on top of that we've got some investments that we're spending on, etc. If you look at the comp net revenue ratio in the business, that has changed quite a bit between the first and second quarter and declined a bit on the comp and benefits line, and that is solely the result of mix.

But in terms of the other operating and administrative expenses, I don't think there's anything particularly going on there except that we continue to invest in the business as we've talked to you about in the past.

Thank you. And on cards, I just want to make sure I understand what the estimate of the 175 million means for bankruptcy losses in North America. Is the notion that based upon your best guess the loan losses would have been on a managed basis in North American cards, would have gone from something like 1.945 billion in the first quarter down to 1.8 billion, or is that not including -- it there an estimate for the first quarter that you didn't talk about? Because it seems like ex that number it would have suggested an awfully big improvement quarter sequentially.

That's right, Diane, and in fact that's what we're seeing. It is -- as I mentioned, it is with art with the numbers put on top of it. And so what the team did is they looked at the rate at which bankruptcies were running in the quarters before they looked at what was happening in bankruptcy rates. They kept on with that trend and they looked at the increase. And so, to give you a feeling of perspective for that, typically within our cards business bankruptcies run at 25% to 30% of our net credit losses, a little bit lower, but in the second quarter it was 33%. So we definitely saw an uptick in the bankruptcies there and then as a sort of art form attempted to quantify that for you.

Thank you very much.

Todd Marr (ph).

This is Meredith Whitney calling from CIBC. I had just two questions. Sallie, I just wanted to clarify your interest rate outlook for the remainder of the year. And then my second question is related to something that Chuck had said about the cards business. Clearly it's an industry wide phenomenon that prepays are causing receivable damage; but I was wondering in terms of your American Express relationship, what are you doing to augment your fee side and can you give us some type of outlook for your American Express relationship? I know it's going to -- stated to begin in the fourth quarter.

Meredith, good morning. In terms of the interest rate outlook, that's also something that we do not provide for you. Suffice it to say, however, I will be candid with you that the yield curve year-to-date has certainly flattened more than we looked for. We talked about it in the fixed-income businesses downtown, but it's also flattened more than we looked for as a corporation overall. So that has in turn impacted the results to some degree. Chuck?

On American Express, my earlier comment was that as a mix of business a company like Citi makes more money from balances than a company like American Express does. That was my earlier comment. In terms of the American Express relationship, it's still quite good. We're still on track to roll out our version of the American Express card. You said fourth quarter, I'm not sure whether it was fourth quarter or early in the first quarter, but it's on track for that kind of time frame.

Okay, thanks very much.

And I'll add on that while Chuck is right and he's the boss too -- that interchange is an important part of our revenue profile within the cards business and it's actually increased over last year. Certainly there was an interchange price increase which we began to see in this quarter. But in addition some of the newer --.

-- (inaudible) the transaction volume.

Exactly. In addition some of the newer products that we've rolled out and the higher transaction volume, the new stuff, I was going to say, tends to play more to a transactor type of client. And so all things being equal, the lending is more important as part of the revenue stream but the interchange has got some importance to it and has been increasing in importance.

Just making sure I'm clear; we get it from two or three sources, a company like American Express gets it more from another source and so when balances tend to come down but transaction volume is up on a company that's more weighted that way we'll see a more immediate increase.

I appreciate that. I was just trying to get some -- maybe some scoop on the American Express relationship.

It's going well. It's going well.

At this time we have no further questions.

Very good. Thank you very much, operator. Thank you all for joining us this morning for this call and presentation. As always, please feel free to call us at investor relations throughout the day and the week as you work your way through our results with any questions you may have. With that let me end this call. Thank you.

Thanks, everybody.

Thank you.

Thanks you. This concludes today's conference call. Thank you for your participation. You may disconnect at this time.