花旗銀行 (C) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Citigroup's first-quarter 2006 earnings review featuring Citigroup's CEO Chuck Prince and CFO Sallie Krawchek.

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.

As a reminder, this call is being recorded.

If you have any objections, please disconnect at this time.

Mr. Tildesley, you may begin.

Thank you very much, operator, and thank you all for joining us this morning for our first-quarter 2006 earnings presentation.

The presentation that Sallie will take you through is available on our website under the Investor Relations link, so if you haven't downloaded that, please try to as she will walk through that.

We will follow our normal format today.

We will start with Chuck with some opening comments and then Sallie will take you through the presentation and then Chuck will have a few concluding remarks and then we will be happy to take any questions that you may have.

So with that, let me hand it over to Chuck.

Thank you, Art.

Good morning, everybody.

I'm going to take you through a few overall comments and then turn it over to Sallie for her more detailed presentation.

First I would just like to say I am very, very pleased with our accomplishments and our financial performance this quarter.

I think we did very well and a few points on our results.

We had record net income from continuing operations of $5.6 billion and record EPS from continuing ops of $1.11.

We had record international revenues of $9.4 billion, up 19%, and I'm going to talk a fair amount this morning about revenues.

As you know, we have been trying very hard to focus on growing our topline and I think we did a very good job this quarter.

Directed international revenues drove international income up 47% and with this growth our international businesses contributed 49%, nearly half of our income this quarter.

Our capital markets related businesses also had a terrific quarter and I want to complement Bob Druskin and the team especially on doing a good job.

We had record revenues in fixed income.

We had record revenues in equity markets.

We had record revenues in investment banking, and we had record revenues in global transaction services.

We also had record revenues at Smith Barney, with very, very solid growth there.

In our international consumer business, our investments are beginning to generate meaningful results and driving strong customer volume growth with earnings up 21%.

We also see in the international side net interest margin expansion as compared to the net interest margin compression we see so much in the U.S.

Now turning to the U.S., one of the ways I think about our results is we had terrific results and yet we were not firing on all cylinders and the cylinder we weren't firing as well on was U.S. consumer.

In U.S. consumer we saw good customer interaction.

We saw sharply lower credit costs.

Credit costs in U.S. consumer benefited from a shift in our asset mix, but we also saw that our revenue growth was not where we hoped it would be.

I think this means there is upside for the whole Company that is not firing on this cylinder and still having terrific overall results means there is really upside here.

Last year we made changes here in people and strategy.

I was not satisfied with what we had been doing and while I do not expect a quick turn, I do expect better results and again that will make upside for the whole Company.

Lastly we continued to execute on our buyback program repurchasing $2 billion of our stock, an additional 43 million shares, and I'm grateful to say our Board has approved an additional $10 billion buyback program reflecting our strong capital position.

Now I am also pleased to talk about our strategic accomplishments this quarter and these are things that we laid out for you at the Citigroup day in December.

We have clear strategic initiatives and we continue to execute on those initiatives.

I have said very publicly that 2006 is our year to execute, to perform, and the first quarter fit very nicely into that model.

These initiatives are to expand our distribution both internationally and in the U.S., to transfer expertise from business to business, to invest in our technology and our people and to allocate our capital to maximize shareholder returns.

Let me talk about a couple of those.

In the first quarter we expanded distribution adding almost 300 branches, a record number in a single quarter.

So you saw that internationally especially we added 72 retail bank branches, 130 consumer finance branches, and 60 automated loan machines.

These branch openings were in Mexico, Russia, Brazil, and 15 other countries.

You probably saw our announcement that we are just about to reopen in Kuwait, another expansion for us internationally.

We also launched Citibank Direct, our full-service Internet bank, a big change for us the way we are managing that in the U.S. consumer business, and we are very pleased with the results.

In the first ten days following the launch, we had ten times the volume we predicted.

We have already surpassed $.5 billion in deposits and every account opens also a checking account.

This is not just a deposit taking business.

Citibank Direct expands our retail distribution and helps us compete in many markets around the U.S. where we do not have a retail bank presence, but importantly it is a full-service institution.

You also saw our transaction with 7-Eleven, where we added 5500 ATMs.

We now have a total of approximately almost 9000 U.S.

ATMs and almost 2000 of these are in areas where you have no retail or consumer finance branch.

This transaction places us in the number two position for total non-surcharge ATMs in the U.S.

This is a very low-risk, low-cost way to expand our network and reach new customers.

In terms of transferring expertise across business lines, we have announced that we're going to make Citibank Investment Services, the investment side of our house that has been inside the Citibank branches, a division of Smith Barney and elevate the investment offerings in our retail bank branches by leveraging Smith Barney's product, services, and training platforms.

We continue to break down barriers across businesses to better align ourselves with our customers.

And another point.

We continue to invest in technology and to expand our product capabilities, and you saw this especially in the results in our fixed income markets and our equity markets businesses this quarter.

We are very pleased with results we see from these investments.

This is the kind of strategic roadmap we have set for ourselves.

We have discussed it publicly at Citigroup day.

We are right on track for this and we are really seeing results from our investments.

Now one more point before I turn it over to Sallie.

I want to add that a few weeks ago we were very pleased to be able to share with you the Fed letter that stated that we had made significant progress in implementing our new compliance and risk management programs and the understanding that we would refrain from significant expansion is no longer in effect.

I know that everybody always wants to talk about deals, so let me say something at the outset.

This letter does not in any way change our strategic initiatives or our primary focus on organic growth priorities.

Of course we will continue to focus primarily on organic growth.

That is our model, but we are going to look at deals on a supplemental basis, and those deals will be exactly the ones we have talked about before, transactions that extend the franchise where we do not overpay.

So with all that, let me turn it over to Sallie who will give a more detailed presentation on the financial results, and then I'll come back with a few closing comments before we do questions and answers.

Sallie?

Thank you, Chuck, and good morning to everyone.

I am going to take you through the deck that Art mentioned is on the website this morning.

Let me start with the first page and go through some highlights for the quarter.

This quarter we had record net income from continuing operations of $5.6 billion.

The previous record here was $5.2 billion.

Diluted earnings per share of $1.12 for us for the quarter of continuing ops, $1.11, and that is up 13% over last year and the previous highest number here was $0.98 per share.

We've talked to a lot of you about the attention that we have been paying, the work we have been doing on capital management and so we're pleased to see that the return on common equity in the quarter is 20.3% for us.

As Chuck mentioned, international earnings were just terrific for us this quarter really any way you cut it.

They increased by 47%, driven by 19% growth in revenues and you will see in a few slides really strength across the board in the international market.

International consumer earnings were up 21%.

International corporate and investment banking earnings were up 80%.

As Chuck mentioned, the capital markets related businesses also very strong.

He mentioned the records in equity, which was up 67%; fixed income, investment banking up 34%; and global transaction services a great business for us which continues its string of 20% plus revenue increases at up 22% for the quarter.

Smith Barney record revenues; (indiscernible) or private equity revenues, that is in our Citigroup Alternative Investments business with revenues down a bit from last year.

In the consumer businesses, as Chuck mentioned, international very strong volume growth for us.

One example, cards average net receivables up 14% for example.

And in the U.S., overall good volume growth despite the decline in cards receivables.

I am going to talk in a bit and I have a few thoughts on what's going on with net interest margin for us, but it is nice to see that the pressure there is moderating and really a lot driven by mix.

Favorable credit environment, the bankruptcy filings really as expected down significantly in the wake of the bankruptcy law passed last year.

Next bullet, industry issue which you have all heard about with regards to the banks and brokerage companies, FAS 123(R).

We took a charge this quarter of $520 million after tax.

You will recall this is just timing, it has no economic impact on the Company, but is a pull forward of expenses that we would have seen in future quarters.

There is however an economic impact from the next item, which is a tax benefit that we had of $657 million, which represents the closing of the 1999 to 2002 audit for us.

Ex these two things, it was a clean quarter for this Company, a very clean quarter for Citigroup.

In the course of the quarter, we also delivered these results without sacrificing the investments that we have been making and you will see we opened a record 238 branches and 60 automated loan machines in the quarter.

Chuck mentioned the additional share repurchase authorization and we bought back $2 billion worth of stock in the quarter.

If you go to the next page, page 2 is our summary income statement.

You can see here $22.2 billion in revenues.

That splits into -- and we've split it here for you into net interest revenues $9.8 billion and other revenues $12.4 billion.

The $9.8 billion is down 4% over last year, but I would note it is up 0.5% quarter-over-quarter fourth quarter to first quarter after being flat third quarter to fourth quarter.

The net interest margin year-over-year is down 44 basis points and is down 6 basis points quarter-over-quarter, so you can see the moderation of that trend.

And I would point you to page 31 of our supplement, where we got for you for the first time on a quarterly basis and average balance sheet.

Other revenues up 12% and this revenue line which is now 56% of revenues, so the majority of revenues, continues its string of double-digit increases.

If you move to operating expenses up 17% but recall that there is the FAS 123(R) charge in there which accounts for 7 points of that growth.

Credit is very good.

Credit costs down 18% over last year.

This is not just bankruptcies but also represents mix shifts in the portfolio as well as strong credit management and of course a favorable credit environment for us.

The pretax income is down.

That line is down.

That is a result of the 123(R) charge.

You can see on the next line the tax benefit coming through.

Ex that benefit, the taxes were down 17%.

That takes us to the continuing operations up 9%, which you can see is leveraged through the share buyback that we have been executing really for the past year I guess it was a year ago that we announced the $15 billion share buyback.

As we have executed that of course are now announcing a $10 billion share buyback but as we have executed the share buyback, we have added 4 points to growth from having fewer shares outstanding.

We also put for you on the bottom of the page an indication of the growth in our customer business and the business we are doing with our customers with average interest earning assets up 11% and average deposits up (inaudible).

I'm not going to spend a lot of time on page 3 because Chuck made a number of these points in his comments, but you can see here again just under 300 branches and automated loan machines for us in the quarter, a record for us; 909 over the past year on a total now of over 8800.

So very good growth in the branches and very good investments I think being really made around the Company.

Let's go to page 4 and on page 4 what we have laid out for you is a view of net income by product and by region so to give you two cuts of it.

International consumer you can see there on an earnings basis, our strongest grower with Mexico, Europe and Asia all up very nicely.

In the corporate and investment bank up 15% with capital markets in banking up 12 and in global transaction services on an earnings basis up 32.

Alternative Investments you are going to remember on a couple of pages ago I talked about the revenues being down.

The revenues were actually down 22% over last year but you can see here that that impact was muted onto the bottom line and that is versus a quite strong first quarter of last year.

U.S. consumer down 4%.

Now when you look at the parts of this, you're going to see that the card business is up 19% on good credit.

The other U.S. businesses however are down on spread pressure despite some very good customer activity.

Then finally GWM, at first blush this number really looks disappointing, down 10%, but I would draw your attention to the fact that GWM as we call it, Global Wealth Management, had a disproportionate share of the 123(R) charge.

It's $196 million for this business and in my opinion the underlying health of the business is really more accurately represented by the revenue growth of this division, which is 14%.

I am going to draw your attention -- we have details on each of the individual businesses which I'm not going to go through here but we have them back in the appendix and of course we will be happy as we get to the Q&A to answer questions on any of them.

Let's shift over to the regional view and as we've said very strong performance internationally, which of course has been a very key area of focus for us.

If you look, you just eye your way down the bars here, you can see the strong growth across the board in international.

EMEA, record corporate and investment banking results in EMEA and consumer up 52%.

Latin America, again a strong corporate and investment bank leading Latin America up 28%.

Japan up 27%.

Asia up 21%, and their strength, consumer corporate and investment bank, Global Wealth Management, all in double digits in Asia.

Mexico led by consumer.

It is up, Mexico is up 19%; consumer is up 29%.

Then at the U.S., down 13%.

Consumer here is up 2%.

The corporate investment bank is down in the U.S. as all of its growth was overseas and had some pressure in [FIFO] and then Global Wealth Management as mentioned in the U.S. had the 123(R) charge.

Taken together I think you look at these two charts and I think they give you a pretty good view of the value and strength of what we believe is the Company's -- what we believe is the value and strength of the Company's global platform and its diversity.

Page 5 gets to operating expenses.

Operating expenses you can see up 17%.

Recall as you see over on the right that 7 points of that is the 123(R).

One point of the growth is investments this quarter, so that is one point of the growth over last year, whereas 9 points is from other stuff; 4 points from the investment bank incentive compensation up and I will remind you if you haven't seen it yet that 21% CIB revenue growth and as the mix has shifted there more towards equity than investment banking, the rate has increased. 2% of the growth is variable along with the revenue growth that we are seeing and 3 points of the growth is fixed -- the acquisitions we have done and other as some of the fixed and semifixed expense follows the volume growth that we have been seeing at the Company.

Page 6 talks to the capital.

I think I can make a summary comment on this by saying that our capital position is very strong as a Company and the returns on our capital are likewise very strong.

You can see the total stockholders' equity and trust preferred securities of more than $120 billion.

The tier one capital ratio 8.5%, so strong there.

You can see the common stock dividends and the share buybacks, the two of those combined we returned $4.5 billion worth of capital to our shareholders in the course of the quarter.

Then finally on page 7, this is the last page I'm going to take you through today although we're happy to go back and [refer] to some of the pages in the appendix.

I wanted to make it -- as I was going through these numbers and looking at the numbers through the course of the quarter, I had a few observations that I wanted to share on some of the things that I am seeing and some of the things that I'm pulling out of the numbers.

The first is as mentioned before record international revenues I think goes without saying.

But note that it led to double-digit earnings growth as revenues -- to double digit earnings growth for consumer, the corporate and investment bank and Global Wealth Management overseas.

This quarter international earnings are 49% of the Company's earnings and clearly Chuck has articulated a goal and has directed the investment towards international and it's nice to see those first signs of the investments paying back.

Record corporate and investment banking revenues is the second bullet here.

I think this in itself is absolutely terrific.

What I find to also be terrific and actually quite interesting is the composition of the growth of the corporate investment bank revenues from last year this time to this quarter.

The corporate investment bank has I think a very well -- I know a very well deserved reputation as being a strong fixed income franchise.

Interestingly in this year-over-year comparison, just under half of the revenue growth in capital markets and banking came from the equity business.

In the corporate investment bank, about 90% of the growth came from international and within fixed income, our emerging market sales and trading business which is the trading business we have in 80 plus countries around the world was the majority of the fixed income revenue growth.

So again I point this out because these are clearly areas where we have been focusing our investments and focusing some efforts and it is good to see and gratifying to see the signs of those paying back.

Now as Chuck mentioned, not all of our businesses performed well.

Otherwise we would have had higher earnings than this.

In the U.S. consumer, the results there as you go through them you're going to see a continuation of the trends that you saw in '05 and that we've talked to you about.

There's one exception to that, which is that our consumer lending group, which was growing earnings for us through the course of last year was somewhat down on lower gains on sales from the flat yield curve, flat environment.

I would point out though that while revenues and earnings are down, please note that average deposits are up 7%, loans up 9%, and card sales are up 11% across U.S. consumer.

That growth if you're interacting and have good relationships with the customer, that growth will lead even if over time to revenue growth.

So with the reorganization that we did, that Chuck did of U.S. consumer last year with the investments that we are beginning to make, and with this I think very clear evidence of the customer is engaged with the Company.

It may take some time, but we look for the business to return to growth.

Another point I wanted to make going to the next bullet is on the net interest margin compression and talk a little bit about -- we tend to talk about it and communicate about it in a vacuum, but to also talk about what's going on with that with regards to movements in credit.

Let me if I could back up to this time last year, this time last year we were seeing pressure on the net interest margin.

At that point, the pressure on the net interest margin was primarily from spread, right, so what we were charging the customer was not going up as much as the cost of funds.

As we went through the course of the year, it became not just spread but also mix, so as the portfolio composition was changing, and now as we are into this quarter, it is much more mix and mix within the businesses.

Now why do I discriminate between the two?

Because of course spread pressure flows through the bottom line but the impact of mix can be muted to the bottom line through credit.

Let me give you an example.

If for example we are moving our shift more from cards for example to mortgages, which in fact is in part what has happened, we will give up 800 basis points on average in net interest margin.

So the very thing that drives the net interest margin to be greater, which is credit, right -- better credit in the mortgages, drives credit to be better.

So you give up about 800 basis points as you make the move on net interest margin, but you get about 500 basis points on a normal basis on credit.

So rather than having the whole 800 fall through to the bottom line, you have about 300 fall through to the bottom line.

And so I just want to be careful about talking about this just in a vacuum, because the composition of the portfolio has shifted and it means different things for the risk of the portfolio, it means different things for the earnings of the Company.

And of course what has been happened is the credit has been good and then to compress that impact has been muted to our bottom line even ex -- you can ex out whatever you want.

You can ex out the bankruptcies and then do any of those topics, but it has been muted somewhat.

Of course again quarter-over-quarter, we are seeing less pressure than we were seeing on average over the course of last year and more strongly driven by mix.

The final point -- the final two points I guess, organic income growth, this really is a quarter that is about organic growth.

If you look to what the Company is capable of doing on an organic basis, I think this is quite representative of that.

Then finally the investments.

You ask us about the investments and how they are doing, so I wanted to give you an update.

One year and a bit into the investments that we have been making in the Company, having made the '05 investments, we track the investments as you would hope branch by branch and trading desk by trading desk and as we look at those investments, they added in this quarter about 2 points to international consumer revenue growth; about 4 points within that to the international consumer finance growth; about 2 points to international retail bank; you've got a 1 point to international card.

We estimate although for estimating for all of Citigroup is harder because it is a little bit tougher to estimate growth from investments downtown in the capital markets and banking businesses because of the nature of the trading business, so we estimate for all of Citigroup it's about 2 points of contribution that the investments are making to the Company and to the Company's top line.

So we feel very good.

We feel very good.

We're tracking the investments closely.

We feel very good about them and we're pleased we think in this quarter to begin to see the results of those investments showing for the Company overall.

So with that, let me turn it back over to Chuck for a couple comments and then we will open it for the Q&A.

Sallie, thank you.

Nice close to that.

Nice summary of the quarter.

I'd like to close with just a few thoughts.

There are three topics that we think a lot about, that we hear from you about as well.

One is strategic, the unprecedented growth in our global opportunities and our unique ability to deal with that.

And the other two are more tactical, the credit environment and the interest rate environment.

Strategically as I said, we have unique advantages on the international front that are not available to other financial institutions.

We've been investing in these opportunities and we've been working hard to extend the gap between us and our other competitors.

Tactically we are facing a very favorable credit environment.

Historically very positive, which is providing obviously a positive environment for our earnings.

On the other hand, the difficult interest rate environment is historically very negative for us and has created a very difficult earnings headwind for us especially here in the United States.

These factors will change six months, 12 months from now and so forth, and eventually are likely to revert to their means, but right now as we focus on credit, we focus on interest rate, we focus on growing our international franchise as quickly as we can, what is important is that within this environment with our balance we are able to deliver very strong financial results.

As we said, the record $5.6 billion in income at the same time a 20.3% return on equity and at the same time returning almost $4.5 billion to our owners.

All of that while continuing to invest at an unprecedented rate in the unprecedented global growth opportunity.

So let me finish as I began.

I'm very, very pleased with how we're doing as I look back at the quarter and as I look ahead to the rest of the year.

I have said very publicly that 2006 is our year to perform without excuses.

I feel we did that in the first quarter and I'm very confident we are going to do that over the balance of the year.

So I feel good, and with that I would be happy to turn it over to Art and Sallie and I will take questions.

Than you, Chuck.

Operator, we are prepared to open it up for Q&A.

(OPERATOR INSTRUCTIONS) Guy Moszkowski.

With Merrill Lynch.

Thank you.

Good morning.

On the U.S. cards business, I think your comments with regard to mix obviously that is pretty clear, but just within the cards business it seems as if you are seeing some pretty considerable revenue compression if we just take sort of total post securitization revenue as a percent of managed assets down quite a bit versus last year and versus last quarter if we exclude the rewards card charge last quarter.

Can you talk a little bit about what's going on there?

Is it a mix shift in favor of the rewards card that is causing this to happen?

Is it just the funding costs?

Yes, I will talk it just for a minute.

And it is going to sound a bit like what we've talked to you about in prior quarters.

What we're seeing here is yes, we are seeing a mix shift from some of the more revolving cards into the rewards cards, which are more [transactive] in nature, which is why you see the 11% sales growth, which we feel quite good about.

But the part that makes it a little bit tougher in terms of the revenue perspective is the payment rate as a result remains high.

It remains high for the industry, it remains high for us.

The payment rate in the first quarter was 20.3%.

This compares to 19.7% I think that we saw in the forth quarter and 18.3% a year ago.

Payment rates are high.

We do have still a bit of spread pressure within the business that your are seeing -- (technical difficulty) and you can see that in the supplement and as a result of this, we are seeing the results (technical difficulty) of other bits in there.

Right?

We've had some pressure from (technical difficulty) so we no longer get the revenues from those folks.

We have some pressure from the faster write-off of the rewards points.

So we can pick our way through it.

The bottom line is that it is really is the same that we've seen before with the high payment rates during having pressure on revenues.

You can see of course that credit was very good so the bottom line was very good.

All of that is fine.

What are you guys going to do about it you're probably asking?

Of course Steve with (technical difficulty) his team with his experience in the cards business is very focused on putting out new products such as the (technical difficulty) product, the Premier Pass, which is doing very well for us, more in the business segment, the American Express card that was a joint venture we had with them.

There will be more marketing behind that (technical difficulty) this year.

These gentlemen and ladies are very focused on getting the growth, working to get the growth in receivables and the growth in revenues so that we can have this business be in a healthier and growing state on the top line.

Sallie, you talked about deposits being up about 10% year-over-year.

Can you differentiate for us between the growth of interest-bearing versus non-interest-bearing deposits and on the U.S. versus the international side on that score?

Yes, in terms of the deposits that we are seeing, we have got the non-interest-bearing in the U.S., which is growing at the least of our rates, while the interest-bearing deposits outside of the U.S. growing at the highest rates if you're looking at versus the early part of the year.

That sort of makes sense, as rates are going up, the corporate customers will also be the non-interest-bearing customers are recognizing -- gee rates are up -- I'm losing more money by not getting a rate.

Whereas of course in our overseas markets both in the consumer -- in the corporate business as well overseas, we are seeing some good growth there as well.

Finally if I can ask a question about just refinements if any to your U.S. retail strategy?

Are you looking more within the U.S. at expanding your regional footprint at this point or strengthening franchises in key markets where you are already either very strongly present, like New York, or moderately present like California?

Has there been any kind of refinement in the mix of expansion strategies there?

Guy, this is Chuck.

I think that we are going to be doing both, but it clearly is not going to be just on defending the homeland.

In other words we're going to be expanding as well.

This is more of an expansion as well as defend and if they had to -- we never want to give up where we are obviously but we do want to expand the footprint.

Okay, that's fair.

That's very helpful.

Thank you very much.

Let me add to that, Guy, you are also seeing with the ATMs and the e-banks some creativity there and it is curious to me -- we talk about our retail bank a lot.

We have lots of opportunity there.

We earned $100 million from our U.S. retail bank in this quarter, which on first blush that's boy in the context of Citigroup, clearly is not the largest part of Citigroup, but I think it gives you a feel for the opportunity available to us as we grow our U.S. retail bank just as first of the size our European retail bank and our Asian retail bank and our Mexican retail bank and sort of as we look to do creative things there.

Great.

Thanks a lot.

Andrew Collins.

Piper Jaffray.

Congratulations on a solid quarter.

Just a couple of questions here, one on EMEA and Asia.

I was wondering CIB was very strong there.

I'm wondering if you could talk about the pipelines and is this kind of a permanent shift, if you will, and more toward international earnings there?

Yes, they were strong and they were certainly records I think.

As we look across the pipeline, the pipeline remains quite strong for us really across the businesses and there is no particular region where it has weakened -- you know, it is sort of weaker than it has been going forward.

So in terms of do we expect them to grow faster?

I think the answer is yes with volatility and that as markets -- EMEA, remember is not just Western Europe, which makes one think about it a certain way, but is also Eastern Europe, which has greater growth characteristics, Middle East Africa.

So that when you think about the business that way and you think about Asia and the growth that's available to us there and you think about the very, very strong franchises we have in those markets where we have been there much longer than anyone else, I think you can see the opportunity is swift.

It won't up in a straight line, but the opportunities continue to be quite great for us.

Great.

And just a second unrelated question.

I noticed in the credit area we saw releases in addition to lower costs and I'm just wondering how much of that could be related to the change in bankruptcy law as it impacts not only your credit card business but other areas as well?

Not a lot.

We had moving pieces this quarter when it came to the loan loss reserves.

We had in addition in Taiwan -- we had a bit of a release in other areas in Asia.

We had a bit in card, but you're going to recall while we are of course on the other side of bankruptcy and are seeing a benefit from that, we are looking this year to having implemented the minimum due payments in the cards business so that's something we will be watching as well.

So it is hard from here to look for credit to get tremendously better in cards and therefore to releasing a lot in terms of reserves.

A lot of moving pieces in terms of loan loss reserves for you this quarter.

Yes, certainly.

Thank you.

Glenn Schorr.

UBS.

One follow-up on the net interest margins, Sallie.

I appreciate the comments of down 44 basis points year-over-year and down just 6 sequentially and then your comments about mix.

I guess the question is what environment -- this could be an obvious question, but what environment does that reverse course?

In other words do we sit down here as you have gotten more asset liability neutral even if the curve steepens, or do you go back to that traditional environment of that -- what we're waiting for U.S. consumer to have less pressure on it?

What I would say, Glenn, is if you look at that clearly, the toughest part of a flattening yield curve cycle is as the yield curve flattens, right?

We're going to assume for a second it doesn't invert and stay inverted for a while.

But as it flattens you feel the pressure of that through the business and you can put that off for a period time through actions but essentially over time that comes through.

I think what you are seeing with us right now is that the pressure that we've seen as the yield curve flattened -- I'm not going to say it's going to be gone for forever but we look for in the consumer businesses that to be behind us.

By the way do note too that we're talking about U.S. consumers here.

Please note that the net interest margin in our international consumer businesses across the board expanded for us.

So there will also be of course a mix issue with that.

But I think as we're looking if we are expecting a flattish yield curve environment this year, next year -- the loan, deposit, (indiscernible) the balance sheet growth will catch up into revenues over time, so the balance sheet will grow.

We are in a flat yield curve environment the revenues will begin to grow as well.

So it is a matter of lapping this and getting it behind us before we start to see the growth.

Please don't forget that the majority of our revenues have been growing at a double-digit clip for a period of time as well.

Fair enough.

Just a point clarification on your mix comment.

Less cards and more mortgage, is that a function of just less cards meaning the business isn't growing as fast and you are making money and you are deploying it into mortgage securities?

Or is there a real conscious sell-down of receivables to securitize more and purposely buying mortgages?

That is a fair question and I would say that the mix shift that's occurred with the Company and we'll just step back for a second, the many mix shifts that are occurring, obviously U.S. into international is very much one that we have worked to drive.

Within businesses we have driven mix shift.

We talked to you about in our consumer finance business for example moving more up market in those businesses.

The fact that mortgages has been growing is no accident or it's not something that we've done -- we can't grow cards, let's grow mortgages.

This is -- it's mortgages, it's home equity, it's investments that have been made into the business.

It is accessing distribution channels around Citigroup that were not accessed as effectively in the past.

I will make one comment.

Do note that it is really the variable mortgages that we hold on the books.

We sell off the fixed mortgages by and large.

So the growth in mortgages has absolutely been something that we have driven.

The growth in the commercial business we have driven.

The growth in the international businesses we have driven.

I would not be telling you the full truth if I told you we meant to shrink the U.S. cards business.

So I won't tell you that, but some of it has been by plan and some of it has been I think kind of worked out exactly as we had hoped.

Okay, last one.

Capital ratios go down a little bit even though equity rises 2 billion.

So net-net of all the buybacks and all that, I guess that's the big rise in trading account assets and increase in loans?

So in other words there's a little bit more leverage on the balance sheet?

Is that a fair assessment?

That's exactly right.

We had good earnings.

We bought back some stock.

We gave you a dividend and then we grew the balance sheet, a lot of it down at the corporate and investment bank.

That should not be too surprising as you -- well, first of all seeing the results in the Corporate and Investment Bank and what they're doing with the balance sheet that they have been given as well as the fact that there tends to be a spike fourth quarter to first quarter.

I think part of it is budgets get done but also the first quarter is a big quarter for the street.

Okay.

Thanks, Sallie.

John McDonald.

Banc of America Securities.

Sallie, I was wondering if you could give a little more color on the decline in the lending revenues in CIB?

It was attributable to lower hedging results.

Just wondering if you can give more color on that, it went down to [411].

Yes, that was the interplay this quarter between the -- as credit spreads moved and we had hedges on the books, we had some movement in the hedge which caused them to be down.

I'm not saying I wouldn't think about this as being any type of overall decline in the business because the loans are growing there at quite a good rate but rather as volatility in the business as a result of hedging.

Okay.

Last couple of quarters have been more like $500 million or $600 million.

Now we're down to $[400] million.

Is this more of a normal type of quarter this quarter, or are you just saying it's going to bounce around?

I think it is going to bounce around.

We are trying to take some of the risks out of the books.

We have been putting on more credit fault swaps for example to try to make it a less riskier business but I cannot promise you that we will not see volatility through the business going forward.

Okay, just to follow up on the capital question, can you remind us which capital ratios -- I know there's a couple that you're kind of managing to which are most constraining factors for you on the capital ratios of the many you look at?

Sure, and as you will recall, the constraint will change depending on where we are growing the business and what that is in any point in time.

Currently right now and actually this has been the case for a while the tangible common equity to risk weighted managed asset management ratio is our tightest.

That is not one that we have in the supplement for you but it is the tightest.

In the quarter it is 6.84% for us and as you recall, we like to run that above to 6.5% types of levels.

Okay, thanks.

Meredith Whitney.

CIBC.

Good morning.

I had some questions on expenses and your outlook for the year.

Your body language and your dialogue seems very bullish and I was curious if you could comment specifically on going back to your investor day in December when you were -- voiced very excited, were very excited about your ability to cross sell between your different consumer lines, mortgage, credit card, etc.

And then the technology that is required to enable you to do that and then what looked like a lower than I expected technology investment in the quarter.

So, given your outlook for a bullish year, how much of that is including a real investment in technology and platforms and systems etc. and how much of that is excluding?

Well, Meredith -- this is Chuck -- if I may I think the premise of the question is off just a tiny bit.

We talked in December about increasing our cross sell as you put it between the various business units and about improving our technology.

Neither of those things were things that we hoped to accomplish in 90 days.

Both of those are long-term kinds of activities measured over a several year period of time.

So I'm not sure what you were referring to in terms of what you did not see in the first quarter, but if you can be a little more specific, I would be happy to try to address that.

Just some directional standpoint in terms of where you're going with that?

I hate to bring up your competition, but JPMorgan has been very deliberate about laying out where they need to go in terms of technology investments and then how that incorporates with their outlook.

If you could provide similar -- not detailed but at least direction?

Well, what I said in December I still feel, which is that our investments will be made within the envelope of technology spending we have been doing.

As I said in December, we are not interested in the big bath approach to changing technology and it is going to be much more within the envelope of our current spending that we're going to upgrade and make more consistent, more common the systems that we have.

So I don't think we have laid out a specific technological spend forecast, nor are we really interested in doing that.

And I think you are going to see that our technology investments as I say will be within the envelope of spending that we have had up until now.

So nothing -- no surprising movement either way?

We try to avoid surprises all the time.

Thank you.

David Hilder.

Bear Stearns.

I guess the one thing though you've obviously produced a very good quarter, a bit of a surprise to me was that despite the very strong revenue growth in the Corporate and Investment Bank you even after adjusting for the FAS 123 expense, you had pretty significantly negative operating leverage.

Obviously that reflects some of the revenue decline in U.S. consumer.

Any updated thoughts on what we should think about in terms of broad top-level operating leverage for the year or for the remaining quarters of the year?

Sure, David.

This is Chuck.

As we have said pretty consistently, we are not going to predict operating leverage.

I think what I would look at if I were you is revenue growth and especially in the U.S. how that fits in terms of the credit experience because there's clearly as Sallie tried to highlight, a trade-off right now in the States between those two.

And so if you look at one side of the coin, you have one impression.

If you look at both sides you'll have a different impression, as well as our investments.

We have broken out very clearly that -- we have disaggregated what we're spending the money on so you can see what that is.

And as revenues go up, we are going to have especially at CIB more comp expense.

And we're going to have more variable expense, but I think our business as usual expenses are going to be pretty tightly managed.

In a revenue environment that is more quote "normal" as it relates to spread compression, we're going to have terrific operating leverage and in a yield environment which is as strongly negative, historically negative as this one is, given our need and our strategic plan to invest in the business, it is going to be a little more challenging. (multiple speakers)

Even at the Corporate and Investment Bank, I think if you ex out the FAS 123 expense you still had modest negative operating leverage there on a year-over-year basis.

Yes, you know, David, let me -- I want to make one comment (multiple speakers) But I'll talk to that as well which is if you look at the Corporate and Investment Bank, we still had I think very good pretax margins.

So while it might have been a little bit negative from one year to the next, we were at a pretax margin of 40.8% ex the 123(R) and it was 40.7% for all of last year, so I think very good profitability, a little bit of shift between comp and non comp expenses.

I think we feel good if you look at -- if you go back and you take a look at what the mix was at the CIB, with the equities and the investment banking as higher percent of those revenues as we can find in our historic systems and those are more comp intensive businesses, you can begin to understand the move in revenues and how it relates to -- how it relates to the comp.

Let me if I could, David, I wanted to make one comment on the operating leverage as I think about it.

The expenses tend to follow a bit more closely to customer growth and receivables growth and loan growth and all that stuff as opposed to behaving themselves all the time when it comes to movements in interest rates.

Okay?

And so as you have seen us expanding the balance sheet, the good customer parts of the balance sheet at 10, 11%, the expenses will follow that.

What we've delivered this quarter and what we have talked to you about I think in the last quarter and in a couple of the areas where we have spoken is that we very much want to deliver bottom line growth in excess of the topline growth.

This quarter it was because of credit and expenses were a bit higher.

As Chuck mentioned, there are interplays between credit and the revenues, and so in two quarters, three quarters that may shift.

One thing we really do not want to do as a Company is given the opportunities that we have in front of us, we do not want to be holding back on investments per se which are very easy to cut in order to deliver a financial metric when we can deliver these kind of earnings and returns to the shareholders and invest at an impressive interest rate for the Company.

So that's sort of the pieces that we're thinking about as we think about the operating leverage.

Although again if I am understanding this correctly, the investment spending was 1 percentage point of the year-over-year expense growth and the overall expense growth ex SFAS 123(R) was more like 10%?

Absolutely.

So if we cut it out, we would not have made positive operating leverage at any rate.

And then as I said, you have to start to look to the volume growth in the customer business and so on as well as the CIB mix shift and the mix shift for the Company overall to get all the pieces.

Well, and I'm glad to hear that the equity business is compensation intensive.

One further question.

The balance sheet growth from the end of the year, is that -- it looks like 6% or so.

Is that something you will continue through the rest of the year or are you trying to get to a level that you may maintain, say, more flattish from here on?

It's an interesting question.

I would say when it comes to the customer portions of the balance sheet, those we certainly do want to continue to grow.

That would be the idea, to grow those good businesses from here.

In terms of the portions of the balance sheet with regards to the Corporate and Investment Bank, they certainly have shown growth over time but those would tend to be a bit more opportunistic, perhaps a bit more or certainly a bit more volatility in those.

Great.

Thanks very much to both of you.

[Ron Manley].

Thanks.

The company is GIC.

I have two questions.

One is on the 123(R) charge for this year, the $122 million after tax.

Is that the whole year or are we going to see $122 million per quarter?

Yes, the $122 million is for the January '07 grant and that will be -- we are accruing that through the course of the year, so it will in fact be $122 million for each quarter of the year -- I'm sorry, what, John?

John was just motioning to me that it stays the same, and so you would see a continued impact from that through the course of the year.

Right, so in other words it will be about $500 million for the whole year after tax, $122 million times four in other words?

Yes.

And the other question was on the net interest margin.

Any chance you can give some more detail by the trends in the U.S. versus the international trends?

I know you gave the overall figures and down 6 basis points from the fourth quarter and dollars were up and so on.

Can you split that between domestic and international?

Sure.

For the international business, Ron, year-over-year we saw an increase of 28 basis points and for the quarter-over-quarter we saw 30 basis points.

We can see an acceleration really in the improvement in our international businesses.

It really was across each of the businesses, so cards was up 25 basis points -- this is over the fourth quarter -- City financial up 26.

The retail banking business, if I look at that on a deposit basis because it is more deposit intensive sort of up 3 basis points.

The U.S. business if I look at that on a loans and leases basis, on a GAAP basis, it was down just over 100 basis points year-over-year, so first quarter to first quarter, but is down 20 basis points quarter-over-quarter.

I hope that gives you a feel for where some of the shifts are.

So it seems like the pressure is abating a little bit in the U.S.

The linked-quarter decline was less than times four was less than the full year decline.

So is that the way we should take it that the U.S. pressure is abating?

I think that is right and of course I'll sort of continue to make the point one has to recall there are mix shifts in there too.

So I think if you were to look at the underlying, it is better than that, and then mix is moving around as well, but yes, that is the conclusion that I draw as well.

[John Chris].

European Investors.

You may have answered this question, but in terms of your acquisition priorities, I was wondering where you put the higher priority on foreign expansion or in strengthening your domestic system?

Well, obviously I want to emphasize we're focused on organic growth before I talk about deals, but in terms of transactions we're looking at expanding our footprint, expanding our franchise.

I think that we have a lot of opportunities internationally and I'm very focused on our international expansion, but I'm also interested in expanding our footprint here in the states.

So I hope the adjectives there give you enough flavor.

Joseph Dickerson.

My affiliation is Atlantic Equities.

I just had a quick question again on the U.S. spread compression.

Other than cyclical factors, I just wanted to know from two other sources if you are seeing compression from cross-selling more through the branch network, leveraging your network a little more?

And secondly, the competitive environment particularly with respect to cards and retail and sort of on the back of that if you could make any general comments about what you're seeing in terms of competition particularly in the New York retail market given the consolidation there?

Sure.

I would start with cards and I would say -- U.S. cards business as you know is a highly competitive business.

I cannot say that we have seen a significant pick up in that level of competition over the course of let's call it the past quarter.

It is very competitive and it's very competitive.

I would say on the retail side we do see increased competition and I think some of that is driven by a lot of folks are opening branches, people of course are coming into our backyard and opening branches and are working to get the business and get deposits.

It is also driven I think from good old-fashioned -- as the rate environment gets more difficult, people turn to price in order to make up the issue, make up the difference through some market share gains.

So it is not atypical of what we would see in this type of environment, so we are feeling that.

We're certainly feeling that.

On the consumer finance side, we are seeing pressure, although I would say that as the regulators have given some guidance to the industry on some of the types of mortgage loans that are being done, some of the types of real estate loans that are being done, I think we are probably seeing some movement back off of some of the crazy competition that was being done.

You can see in our business originations are up very strongly for us in our consumer finance business and we are beginning to see some growth not yet in revenues, but in receivables as we look for that -- remember we pulled back from the more exotic types of mortgages to the lowest FICO score customers last year.

As the business more goes our way we are seeing some receivables growth and that takes a while to work its way into revenue.

So across the way, look, there's not a business that we compete in that's not competitive.

And certainly the U.S. is the most competitive and when you come into this environment certainly you see increased competition, but I would not say it has gone to a level of irrational competition across our businesses.

If I could just follow up on e-Bank and ATM investments, do you think that that will position you better relative to some peers who are increasing their -- or are competing on price?

Do you think that positions you better over the long term?

This is Chuck.

I think that actually it is an innovative approach to these things.

Because of our more limited branch network, we have the unique ability to compete in these ways where others would be far more worried about cannibalizing their own situation.

So I think these are innovative, creative ways of doing things which could be very important to us in terms of our long-term growth.

Thank you.

Don Jones.

I'm from Credit Suisse.

The share repurchase program that was recently approved is smaller than that from 2005.

Would that imply that Citi is trying to maintain some capital, excess capital maneuverability so to speak for future acquisitions?

And if so, does the firm perhaps have any intention to look within the domestic market for retail branches?

I will start and then I'll let Chuck finish.

I think the reason that the buyback that we announced a year ago was bigger than this one is because we had more excess capital.

You're going to remember that we had sold our Traveler's Life and Annuity business.

We were later to sell the asset management business, so we had gains on both of those sales which provided us with capital in excess of what we could effectively deploy into our businesses quickly enough to give our shareholders an appropriate return on their capital.

So we took the opportunity really combined with the fact that we thought that our stock price was awfully low to buy back stock aggressively which we did during the course of last year.

You can see we continue to buy back, to net buy back -- this isn't just a buyback where you cover the dilution of stock awards.

But we continue to net buy back during the course of the quarter.

I'd say as a rule we always first and foremost want to maintain a very strong balance sheet.

The world is an uncertain place and it is important for us to have the capital strength that Citigroup does and should imply and to have the flexibility to do -- you know, when opportunities come along, for us to be opportunistic when they occur.

But we have to balance that with the fact that we don't want to store too much capital earning no return on it or very little return on it, but instead if we don't see that we have the opportunity for a good return to give back to you, the shareholders.

Now I will turn it over to Chuck.

I don't think I need to supplement that at all.

I think that is just fine.

Okay, thank you.

Betsy Graseck.

Morgan Stanley.

I just wanted to touch base on the investment spending that you are doing.

It looks like there's -- you have indicated this before a shift towards the consumer area and in particular U.S.

Could you just give us your sense as to how you see the pace of returns on those investments changing over time and if you could also give us your sense as to how the pace of investments on those investment spending is going to be relative to the investment spend that you had done in the GCIB over the past couple of years?

Yes, a couple of things, Betsy.

You are correct as we look through the course of this year, there will be a shift of the investments more into consumer than we have had in the past and within that into international consumer than we have had in the past.

And so what we've talked to you all about is opening up really hundreds of branches around the world and targeting a few countries for significant types of branch openings.

As we look at these branch openings, the experience we have had with the '05 branch openings is not changing our view of how quickly they will pay back.

You're going to recall the international consumer finance branches pay back for us 6 to 9 months.

The international retail bank branches take a bit longer.

Those can be sort of two years for us before pay back and they are pretty consistent.

We're not seeing from the ones that we have opened really wild swings in the results versus what our expectations would be.

Likewise in the international cards business, those paybacks can be pretty quick for us as well.

So as we look into this year, what we've told you all is we've had incremental investments last year which you could've calculated something north of $1 billion, $1.2 billion and that we do not want the impact this year of investments to be any greater than that on an EBIT basis.

So we look for revenues to start to come through and so the impact to the bottom line is not something we look to be greater.

Did you have other parts of that question, Betsy, that I did not answer?

Just wondering if you could give us some color on how you are thinking about the investments that you're making in the U.S. consumer and the payback periods there relative to perhaps you could give us some comments relative to what you've been seeing in the international side?

This is Chuck.

Obviously the investments in the states have more upside in terms of the wallet size, but they take a little longer to pay back.

It is a much more competitive environment in the states.

It is important for us to do this but it does take a little longer to pay back in the states than it does in the international arena.

Okay, thanks.

Diane Merdian.

Managed net credit losses came in just over $1.3 billion and I wondered if you all had taken a stab at estimating how much of the lower losses were from the special bankruptcies pull through?

In other words, what might those have been without the benefit of the [kick] in bankruptcies in the latter part of '05?

Yes, it's Sallie.

We have.

I have done a GAAP -- the bottom line impact from the improved bankruptcies we estimate to be about $150 million pretax for the Company to the Company's bottom line.

Thank you.

Guy Moszkowski.

Merrill Lynch.

Just a follow up.

You very briefly touched on the minimum payment standards increase and I know that we're not really going to see much impact until later.

But are your models showing you anything that would update us a little bit on how we should think about the impact of implementing this either in terms of revenue because maybe you are reducing rates to try to make people a little bit less sensitive to this or in terms of credit cost impact?

Guy, in terms of -- it is early.

It is actually very early and you'll remember that we got some of the portfolios implemented early part of last year but we got all of them implemented at the end of last year.

I would say that the portfolios that were implemented in the beginning of last year are really performing sort of as expected with a minimum due.

And yes, you are correct.

In some of those portfolios we absolutely are working with our customers to work them through this.

So there will be -- in some of them there has been a revenue impact from it, but these are not dramatically large numbers at this stage.

And as I said it is performing in line.

The impact to us in the quarter was very little.

The impact to us for the year if you will recall in the fourth quarter we talked about reserve additions in advance of the minimum due and so we believe right now all of our models tell us that we are reserved appropriately reserved for the minimum due impact that we will see over the next several quarters.

So we probably should not expect to see a very material increase in provisions as a result of that just sort of a normalization because of the bankruptcies kind of normalizing?

Or is that --?

I would think you would see the NCLs begin to move up from here as a result of it.

But again, if we have done our reserving exactly right to the penny, then you would see the offset in the loan loss reserve and so there would be no flow through to it.

Right, and then just a follow up on the 7-Eleven transaction that you announced.

I am not really sure how much of a transaction it is, but can you give us some impact of what the economics of service chains like that are to you?

And is that surcharge free only for Citi customers or for others as well?

What other sort of costs might have been involved in establishing that?

Guy, that is not stuff that we are or have made public.

It is surcharge free for the Citi customers.

From a competitive standpoint, Guy, since not just you are listening to this call, we would like not to go through the intimate details of that transaction publicly.

Sure, that's fair.

But in terms of putting it in place, your thought process was simply making Citi more attractive as a core transaction bank for people by increasing their number of outlets?

Or was there something else that I'm missing?

Sure, it is a very good way for us as a Company to expand the place in the branch, expand the footprint to get to our customers who are in -- who use the 7-Eleven Store footprint as well as we're rolling out this Internet bank as well, the idea is to pick up new customers there to get to folks through the Internet banks, through the 7-Eleven, but to give additional touch points to our customers and potential customers who are out there.

Got you.

Thank you very much.

I appreciate it.

Before we conclude, Art, if I can, I would just like to say a very public thank you to the management team.

We had record earnings this quarter from continuing ops.

We had great return on equity.

We had very strong organic revenue growth and an unprecedented level of investing in our future all while not firing on all cylinders.

Again, I want to say this publicly in front of the owners.

We have got a great management team.

We laid out a strategic direction in December.

I said we would execute.

We have done that and thanks to the team.

It is going to be a good year.

Okay, thank you all for joining us on this call this morning.

Please call us at Investor Relations with any other questions you may have that we weren't able to answer here.

With that, this ends the call.

Thank you.

This concludes Citigroup's first-quarter 2006 earnings review.

You may now disconnect.