花旗銀行 (C) 2006 Q2 法說會逐字稿

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

Today's call will be hosted 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 conference 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 second-quarter 2006 earnings presentation.

Sallie has a presentation she will take you through.

That is available on our website at the Investor Relations link, so if you haven’t had a chance to open up, please do so now.

You'll have our usual format.

We're going to start with Chuck with some opening comments and then as I mentioned, Sallie will take you through our presentation.

Chuck will have a few concluding comments and then we will be happy to take any questions you have.

Before we get started, I'd like to remind you that today's presentation may contain forward-looking statements.

Citigroup's financial results may differ materially from these statements.

Please refer to our SEC filings for a description of the factors that could cause our actual results to differ from expectations.

With that said, let me hand it over to Chuck.

Thanks, Art, and good morning everybody.

Thanks for joining us this morning.

I'm going to take a few minutes for some comments and then I'll turn it over to Sallie to take you to the quarterly results.

First I am very pleased with our financial performance this quarter.

I'm also very pleased with the progress we are continuing to make on our strategic initiatives.

This quarter was our second best quarter in earnings from continuing operations ever despite the challenging conditions coming out of the emerging markets.

Now you have heard me talk about our long-term financial goals before, so let me list those and then go through with you how we performed.

We said we want to grow revenues in the mid to high single digits.

This quarter revenues grew 10%.

We said we wanted to grow earnings at a faster pace than our growth in revenues.

This quarter net income from continuing ops was up 11%.

And we said we wanted to achieve returns on capital in the 18% to 20% range over the long-term and this quarter return on equity was up 18.6%.

We are also very pleased with the momentum were building through our organic growth strategy and the early results from our investments.

Our business groups are acting differently.

They are starting to connect with one another in ways they have not done before, allowing us to serve our clients more efficiently than ever before.

Now let me give you a couple of specifics.

In the CIB, we had our second-best revenue quarter ever with revenues up 31% and net income up 26%.

Our equity and fixed income market's businesses achieved their third-best revenue quarter and we achieved these results despite, as we all know, challenging capital market conditions which are continuing.

Year-to-date we are number one in global debt underwriting, number two in global equity underwriting, and number two in global announced M&A.

And we have advised on six of the ten largest transactions including BellSouth on their sale to AT&T and Mittal Steel on their acquisition of Arcelor.

We are also doing very well and I am very pleased with our results in international consumer.

Investment sales, consumer finance loans, and cards receivables all grew at strong rates, driving revenue growth of 12% and net income growth of 10%.

In our U.S. consumer business, you have heard me say many times that we are not where we want to be in terms of growth.

You have also heard me say many times that we are very focused on implementing our strategic initiatives to generate growth.

It is still early, but after a long stretch of weak quarters we are beginning to see that the strength in customer activity that we have had is translating into better momentum in many parts of the business.

We know that generating strong, sustainable momentum in our U.S. consumer business is key and I have a great deal of confidence in our team and the progress they are making to deliver sustainable top and bottom line long-term growth in this business.

In Global Wealth Management, fee-based assets increased 23% to $363 billion, reflecting both organic growth and assets from the Legg Mason business.

This resulted in record revenues for Smith Barney of $2 billion.

Smith Barney is one of our most important businesses and I am very optimistic about our ability to grow.

In the private bank excluding Japan, revenues in our business grew 7% driven by strong capital markets activity.

And in addition to our business activities, we continue to execute on our buyback program, repurchasing $2 billion of our stock for an additional 41 million shares.

Now let me spend a moment updating you on the progress we've made on our initiatives this quarter.

We continue to expand distribution by adding branches and by thinking of new, innovative ways to reach our customers and clients with better products and services.

We remain focused on investing in technology so that we have integrated platforms in each of our businesses and connecting our businesses to improve efficiency.

Let me give you some examples.

This quarter we added a record 270 branches, 196 internationally and 74 in the U.S.

Internationally we added 85 retail bank branches and 111 consumer finance branches.

In the U.S., we added nine retail bank branches this quarter.

That is 20 year-to-date.

As you know, we entered this year without a lot of the infrastructure needed to open branches.

The team has now ramped up and we expect to add 35 to 40 new retail bank branches in the third quarter, keeping us on track to meet our target for the year of 100 new retail bank branches in the United States.

We also opened 65 new consumer finance branches this quarter in the U.S.

Overall year-to-date we have opened more than 500 new branches around the world and we are on track for our plan this year to open 1000 new branches around the world.

Complementing our branch expansion strategy is Citibank Direct, which continues to make tremendous progress in reaching customers we wouldn't otherwise reach through our branch network.

As of last week, we have raised over $4.7 billion in deposits and approximately two-thirds of that amount was new money to Citi.

Based on the average amount of deposits per branch, this translates to opening an additional 37 new bank branches just during the quarter.

We also opened our first investment banking offices in Kuwait and Dubai and also established equity research in Dubai.

You will have seen in today's financial Times an article about our plans to expand equity research on a global basis.

We have also made real progress in putting together CIS, which is the investment services part of Citibank and Smith Barney.

We are making excellent progress towards integrating Smith Barney's investment services into our retail bank branches and in providing Citi's banking services through our Smith Barney offices.

This initiative will help to embed Smith Barney product expertise and service in each Citibank branch, significantly broadening our product offerings through our branch network as well as expanding the range of banking services provided to our Smith Barney clients.

In Brazil, the full integration of credit card into our international cards business has allowed us to become a premier credit card company in Brazil.

As you know, credit card has a loyal customer base.

Almost 60% of the accounts have been in the portfolio for more than five years.

We now own one of the strongest consumer brands in Brazil and coupled with 76 consumer finance branches and 75 retail bank branches in Brazil and of this 151 branch network, 40 have been added this year alone.

Credit card is a terrific addition to our Brazilian consumer finance and banking franchise and positions us very well to be a pre-eminent competitor in that country.

In other words, we have got a lot of new and different things going on.

We are seeing very good and improving momentum in all of our businesses.

We are reaching out to our customers and clients and doing it in a better way and we are feeling very good about our momentum and our business results.

Now, Sallie, if you will take the group through our detailed presentation of the financial results and after that I will have a few comments and we will take questions.

Okay.

Thanks, Chuck.

Good morning, everybody.

Thank you all for joining us early on a Monday morning.

Let me page through the deck with you.

I'm going to go through a few of the pages in the deck that we have on the website for you and then we have a more full sum appendix for you to review at a later time, although we will be happy to answer questions on that as well.

In the second quarter, this morning we reported net revenues of $22.2 billion, up 10% over last year; net income from continuing ops of $5.26 billion up 11% over last year and this translated into diluted EPS from the continuing operations of $1.05, which is up 15% from last year and diluted EPS net income up 8% over last year.

As Chuck mentioned, the return on common equity is 18.6%.

In terms of the highlights for the quarter, the capital markets related businesses, we are very pleased with the performance of these businesses given the emerging market volatility and a big emerging market presence.

We had double-digit revenue growth in the equities business, which is up 30%.

Fixed income was up 51% in revenues and investment banking up 24%.

In addition we continued to see record revenues and income in our very strong global transaction services business.

In wealth management the revenues were up 19%.

In alternative investments, we had lower private equity revenues, which in turn drove those revenues down over last year.

In the consumer businesses, the international business, Chuck had mentioned good volume growth.

Deposits there were up 9%.

We saw some spread expansion and as a result revenues were up 12%.

In the U.S., the strong customer activity was 12% loan growth.

We had some mix and spread pressure there, so revenues were up just 1% and while this may not be something to do back flips down the hall about, it does compare to a down 9% result in revenues in U.S. consumer in the first quarter.

You're also going to see as you go through the average balance sheet that we provide for you that we have seen some increased sequential net interest margin pressure in this quarter as compared to the first quarter over the fourth quarter.

But as you also work through that you're also going to see that the additional sequential pressure is all driven by our trading business.

We continue to have a favorable credit environment, lower bankruptcy filings last year in the second quarter began to just pick up a bit.

And in terms of the capital management, the things we're doing with the capital, we opened, as Chuck mentioned, a record number of branches this quarter.

We completed also the second phase of three phases in the Federated Credit Card portfolio acquisition.

We closed the sale as you are all aware of some retail bank branches in upstate New York and had a $92 million after tax gain on that.

And as you are also all aware, we had a gain on the MasterCard IPO which was $78 million.

We repurchased $2 billion of common stock or 41 million shares.

Next page I'm going to walk you through the summary income statement.

The net interest revenues were $9.8 billion for us for the quarter, up very slightly year-over-year but demonstrating the second quarter of quarter-over-quarter growth in this line item.

Other revenues continued its string of double-digit increases, up 19% and the combination of the two of these leads to revenue of $20.2 billion, up 10% over last year.

You will note that we are in terms of revenues is our second highest.

We're $1 million short of our first quarter record so it was quite a different composition in the revenues with consumer businesses up versus the CIB.

In terms of operating expenses, the operating expenses were up 16% and we'll have detail on that later for you.

Credit again continues to be very favorable.

The cost of credit was down 11% over last year and this was driven by business mix shift and by the bankruptcy improvement.

I would characterize the underlying credit environment as being pretty stable at this point.

All of this leads to pretax income from continuing operations of about 6%.

Income tax and minority interest is down, which of course looks a bit odd, but I would point out that all of the degradation there -- excuse me -- all of the decline there which is actually a good guide for us is minority interest from our Citigroup alternative investments business as the mix of the gains in this portfolio shifted to investments in which we had less minority interest to account for.

And the combination of all these leads to income from continuing operations up 11% levered to diluted EPS from continuing operations of 15% on the back of the share buybacks that we have been executing over the past year.

Net income of 4% and diluted earnings per share up 8%.

Return on common equity, you see they are up a bit over last year's second quarter while the balance sheet, the good customer balance sheet, continues to grow very well.

On the next page, page three, I go through the net income for you, net income growth by product and by region.

The Corporate and Investment Bank, this was the second strongest quarter in capital markets and banking and another record in GPS.

The combination of the two of those has the Corporate and Investment bank up 26% over last year.

U.S. consumer saw 11% net income growth and even ex the gain on the New York branches that I pointed out for you, it is a nice earnings improvement over last year and the credit remains very good.

In international consumer we are up 10% on 12% revenue growth and continued investment.

In Global Wealth Management, the results are 8% over last year.

This is off of 19% revenue growth, which has been pressured then in turn by the 123(R) cost which is particularly significant for this business.

In alternative investments, net income is down 33% as private equity exhibited weakness in the quarter.

We have continued performance if we look on the next side of the page by region, continued strong performance for the businesses outside of the U.S.

In Japan, it leads the way in terms of net income growth, up 27% as Japan laps the pressure we saw in '06 enclosing the private bank as well as also saw good performance from the Corporate and Investment bank in the region.

For EMEA up 21%, with strong consumer growth;

Asia up 18%, the Corporate and Investment bank there up 35%.

In the U.S., up 17% with our consumer business up 9 and our Corporate and Investment banking business up 62.

And in Mexico 4%, which is not the results you are used to seeing from us in Mexico, which is a very strong market for us.

I would note that the 4% understates what we would view to be the underlying health of the business.

You will remember that last year we had a $63 million non-recurring net income gain from the restructuring of Mexico government bonds.

And then finally in Latin America, which is down 19%, consumer was up 10% in the region but the Corporate and Investment bank was down 29% on market volatility.

Moving then to the next page, page four our update on strategic initiatives, I won't belabor this.

Chuck had mentioned that we had a record number of branch openings.

And in a couple of the businesses I think it is interesting to note that we opened more branches in six months than we did in all of 2005.

International retail banks, we opened in Mexico, Brazil, Turkey, Russia; in consumer finance, India, Mexico, Poland, and Korea were the big ones for us.

But overall making very good progress on that.

Chuck talked about Citibank Direct and credit cards.

We are also making some progress on our technology initiatives and this quarter we converted -- we executed the largest conversion of cards in as far as we know cards history as we moved 71,000 of our private-label accounts onto the Citigroup platform, increasing the simplicity of the technology operating environment as well as of course looking for cost saves going forward.

In the Corporate and Investment Banking group, particular strength where we have been investing in derivatives, this being the second-highest revenue quarter for derivatives.

In our derivatives business it is not simply a New York, London, Tokyo business, but instead we have been building out platforms in Poland, Greece, Malaysia, India, Brazil, Mexico.

So it is not only a global business, it is also a business that has a very good presence in those markets.

Also in global equity finance, a record second quarter at the CIB helping to drive the equities result up 30% and again, we expand our core services into more of the international and emerging markets.

Page five, this is a page -- this is of growth of customer activity is a page of which we are very proud.

It shows here the growing strength of the Company's customer relationships, which translate into and will translate into very good things on the top and bottom lines.

Average loans up 13% overall.

You can see that the breakdown by the different businesses, average deposits up 15% overall, again we give you the breakdown there across some of the businesses, the assets that we manage in our CitiGold and in Global Wealth Management as well as very strong sales growth.

While these numbers as you look at them I think are impressive or that we are happy with them in and of themselves, what is even better about them is as I was picking through these growth rates and looking at them over time, in 10 of these 12 categories, we have actually had improving growth momentum over this quarter over the past several as we look back.

So all in all, we think a very good story and something of which we are really very proud as a Company.

On page six, operating expenses.

Operating expenses for the quarter up 16% over last year.

As we do for you, we break down here the operating expenses by drivers of that growth; 2 points of the operating expense growth are investments.

We stepped up the investment level a bit somewhat over the first quarter. 2 points is from FAS 123(R); 2 points is in acquisitions, which of course we also see in our revenues.

And 10 points of the 16 is what we refer to as BAU or business as usual.

Of that, 4 points is incentive compensation on 31% revenue growth in the Corporate and Investment Bank; 1% we label other variable; and 5 points is what I would call semifixed, fixed, other stuff.

Of this, the largest piece is an increase in salary and benefits as we have grown our headcount as we have also grown our customer activity and expanded our franchise.

Next page, page 7, is the one where we talk about the capital discipline.

At the end of the quarter we have a very strong capital base, $122 billion in stockholder equity and trust preferred securities.

Tier 1 capital ratio down just a bit from last year at 8.5%; total capital 11.7% on a $1.6 trillion balance sheet.

Dividends $2.5 billion paid out over last year, while we also bought back $2 billion this quarter of stock, which makes it $13.9 billion of stock bought back in the last 12 months.

Finally on the last page, my sort of summary of the quarter, as mentioned before really good business volumes, strong business volume growth globally and improving trends in the second quarter.

The international where we have been investing strongly we continue to see double-digit revenue growth international revenues up 17%, double-digit income growth up 11%.

Something we are very proud of given what has been going on in the international markets and we were actually looking at some numbers recently we have had -- our economists tell us that we have had 90 rate hikes in 32 countries over the past 12 months, and so the fact that we can deliver these kind of results globally I think is a real testament to the strength and diversity of the business.

As mentioned, we saw an increase in net interest margin pressure sequentially, all which was driven by trading and as the Company's business mix has shifted, this has been moderated, this pressure has been moderated by credit.

You recall we talked to you last quarter about this and what we have seen is we have had better net credit losses had been offsetting about 3/4 of the NIM pressure year-over-year as the mix in the businesses have shifted.

As shown by the bullets above, we are also achieving strong momentum on our strategic initiatives both in the execution and the results with about 2.5 points of this quarter's revenue growth coming from the 2005 investments.

So all in all it is a pretty clean quarter for the Company, one in which as Chuck had said, we are meeting the financial objectives we set for ourselves while continuing to invest strongly behind the advantages that only Citigroup as a Company has.

So with that, let me turn it over to Chuck and then we will take some questions.

Thanks, Sallie.

Now let me just briefly share with all of you my thoughts for the second half of the year.

As anybody who watches the news knows, this is a pretty complicated time in the world.

But we remain very sharply focused on our five strategic initiatives, expanding our branch distribution in some areas at an accelerating pace over the balance of this year; investing in technology to improve the customer and client experience and achieve scale efficiencies; transferring our expertise across business and geographies, which is particularly successful for someone with our scale and scope; investing in our people to grow and to better serve our customers and clients; and very closely monitoring our progress to ensure we are allocating capital to the highest growth and return opportunities.

Executing on these initiatives despite the world situation is our first priority and I am very confident that we have the team in place to do this and to deliver a long-term sustained earnings growth and strong returns for our owners.

So with that, Art, Sallie, and I are ready to take questions.

Terrific.

Operator, we are ready to begin the question-and-answer part.

(OPERATOR INSTRUCTIONS) Guy Moszkowski, Merrill Lynch.

Just wanted to ask you first off about the corporate and other expense line.

After a number of quarters of pretty considerable sequential improvements following the second quarter of last year, you're back down to that same level and pretty significant drag.

I was wondering if you could give us some color on what happened there?

Sure.

You're going to see quite a bit of volatility in that line as you have seen in the past.

In general I would say for that line about -- I'm going to call it 40% to 60% on average of it is going to be the corporate treasury line and so as interest rates move and as positions change, you'll see movement in that.

The change if you look at it versus last quarter is the fact that we had had tax benefits last quarter of about $60 million after tax.

Of course, there's a tax benefit, so naturally it's after tax, and so that change in there as well as some increased expenses in the corporate items, there's going to be volatility there.

But looking at this type of line, the volatility we've seen sort of between the 200 number, the 150, it looks like last quarter was quite a bit given the tax benefit we saw quite a bit too low but should be bouncing around in here for a period of time.

So it sounds like what you're saying is that the underlying net interest income picture there has not really changed that much.

It is noise from taxes and some of the other items?

That is correct.

Thanks.

Moving on to the U.S. cards business, could you characterize the expense leverage that you were able to achieve on flat net revenue?

Is that just a decision given some of the mature aspect that we are seeing of the business to cut back on investment or what is it exactly that was driving the ability to do that?

Well, look, as we are looking at the U.S. cards business we are seeing what we think is a bit of improving momentum in that business.

The team has been investing in the business both in marketing, which we are seeing a bit of signs on the organic side that there is growth there.

And remember also that we brought on board as well the Federated portfolio, so taking expenses out in the first place, investing some in expenses to consolidate and then taking expenses out of over time is going to be the goal for us.

But in general I would not say that we feel a lot better, we feel a lot worse.

We are managing it very tightly as the Company, as one should when the business is going through what it has gone through and we'll continue to look to manage tightly on the expenses going forward while still investing appropriately to try to get the growth that we can out of it.

Regarding the minimum payments implementation, is it too early at this point to conclude that anything about that or do you feel like you have enough evidence now to say that it is really not a big deal to credit costs?

That is a very good question, Guy.

In the past we have been deliberately vague in terms of what we thought the impact would be on the minimum payment and happily sell because I would say that we still think it's going to cost us hundreds of millions of dollars in a year, but fewer hundreds of millions of dollars than we did prior.

We have fully implemented the minimum payment.

We began it last year on some of our portfolios, saw the performance of those implemented in all by the end of the year.

And I would say while we were nervous with the initial implementation, that trend has not borne itself out and so while it will still be an impact on the bottom line for the Company this year, I would say on the margin given the good credit environment, given the rationality of the consumer, given the hard work this team has done in the implementation, I know some have talked about it being worse than they had expected.

I would say for us as a Company, while there will still be an impact, it is better than we initially had feared would be.

Thanks.

And then I just have a final question on GCIB, the increase in the provision for unfunded lending commitments.

It is a fairly big number, but the fact that it is such a nice, round number and these numbers have been pretty round sort of in the 50, 100, 150 range, that kind of implies there was not a lot science to it, is there anything that you are seeing that drove you to do this or is it just growth in the balances of unfunded commitments?

What is driving that increase?

All right now, Guy.

First of all, I'm going to say before I answer your question I'm going to say there's actually an enormous amount of science behind our loan loss reserve provision.

We have a lot of Ph.D.s.

We have a lot of computers and we work on it very hard in it is a highly quantitative measure, a highly quantitative exercise that we go through every quarter.

Now that being said, if it is 49.8 that it's looking for, we do tend to given the size of our loan loss reserve, we do round it up.

We round it up.

So with that being said, I will tell you that are seeing in terms of the unfunded commitments as with the entire portfolio we are seeing very good growth in those and we have got about 20% plus growth over last year in the unfunded commitments.

That and a combination of constantly refining and reworking our models has led to the increase.

I would tell you that as we look at it, it is not a differing view or any sort of crack on the underlying credit that is driving this.

It really is as we continue to refine the model every quarter and as we grow that portfolio we've seen that increase.

Okay, my apologies to the Ph.D.s.

Thank you.

Apology accepted.

John McDonald, Banc of America Securities.

A follow-up to Guy's question, Sallie.

In the U.S. card business, just remind us what was the impact of Federated on the average and end of period balances this quarter.

And then ex that, what did you see organically?

With the (indiscernible) rates remaining high, have you seen balance growth on an organic basis?

In terms of the impact of Federated, it is about on an average basis $4.4 billion in loans for us in the quarter, the number of accounts, about 29 million accounts.

And ex all of that, I would say it impacted the revenue by about let's call it 4 or 5 points.

And the MasterCard IPO again you said was $78 million this quarter?

Yes, the MasterCard IPO gain was $78 million after tax.

Okay, and that doesn't recur at all?

That is just one time this quarter, correct?

That is one time, correct.

Okay, and then NIM pressure in U.S. card, would you say that's yield curve, competitive pressure as a combination, mix shift?

Could you give a little color there?

I would say, John, what you're going to see as you go through it which may strike you as unusual is you're going to see pressure on the managed average yield.

So yes there is of course as rates go up you're going to see the cost of funds will increase over any reasonable period of time as funding costs go up, but the yield is declining, which will probably strike you as odd.

That is completely mix shift.

As we have moved the business and the business continues to move away from the traditional what I call the traditional what we call value card portfolio and into some of the newer offerings that we have such as the premier card, the new American Express card beginning to get rolled out, we have seen a mix shift there which has taken the yield down.

Now as you know what will happens is the credit should be intrinsically better a we move into these sort of higher -- what is the word I'm looking for -- these higher end types of cards and we shift the portfolio over there to more transactors and away from the borrowers, which of course is also something you are seeing in the payment rate.

So in general not something to be concerned about on the pricing side or the yield side, but certainly some continued pressure in the U.S. cards business.

Okay.

A question about capital levels.

Where did you stand on tangible capital to tangible risk-weighted assets at the quarter ending?

Could you remind us of your kind of comfort zone there?

Sure.

For the TCE, tangible common equity, the risk-weighted asset ratio, the ratio at the end of the quarter was 6.84%.

At the end of the first quarter it was 6.94%.

If you were to go through the math, I apologize, we like to keep it above 6.5%, so if you were to do the math, you would see that the Company is running on that metric at $3.5 billion in excess capital and that continues to be as it has been for a while our [type of] capital ratio.

Okay, did the sale of the Net Life shares impact your capital flexibility at all?

No, it did not.

Last question, just bigger picture, you announced that you're pulling back from the retail banking in France.

I'm just wondering is that -- are there other areas like that in international where you may not have the scale to be competitive or is France unique in that regard?

It just seems like there could be other areas where perhaps you are not as large --

Sure.

It is interesting as we have spent so much time over the past couple of years, past year talking about the organic growth and the growth in branches, what we haven't talked a lot about is there have been places where we have been paring our presence particularly in the consumer business.

Let me back up.

In the Corporate and Investment Banking business, there really is a strength to that global network and the global web of relationships.

In the consumer business, the strength really comes more from having a presence on the ground and scale on the ground.

And while the office on the Champs Elysees was really very nice, it was not really the type of presence we needed to have in order to be profitable.

We also have pulled out of a couple in the past couple of years are the Central American markets again not because we don't like those markets, but because we simply did not have the scale and as we really try to continuously work harder and harder and harder on allocating our capital as aggressively and dynamically as we can for the highest growth and returns, it just doesn't make sense to have hobbies in certain markets.

I would put the sale of the New York upstate branches in that category as well, whereas people may have thought that -- gee, you're looking for deposits, you're looking for branches, but that was not a profitable area for us either and so it made sense for us to move out of those.

But will there perhaps be more?

We don't have any clear plans for more but we will continue to take two steps forward in growth and then baby step -- a teeny tiny baby step back to make sure that each of -- all of our capital is working as hard as it possibly can for our shareholders.

Okay, thanks.

Mike Mayo, Prudential Equity Group.

Sallie, I think you said that the shortfall even if it is only like 0.25% or $15 million came from capital markets outside the U.S. and I guess that was not true of all the brokers we saw report last month.

I thought Citi generally benefited from turmoil in the emerging markets.

Can you talk about that and also talk about the backlog and what you see there?

Sure.

As I was actually looking at all of your estimates yesterday evening and as I look at how we did, it looks like the consumer business is looking in good shape but where I did see a shortfall was in some of the capital markets businesses both in terms of the CIB and CI.

Now my hypothesis might be if you look at our results in international, which was excellent considering what's going on in terms of the volatility outside of the U.S. and your expectation, my hypothesis might be that that may be the reason for the shortfall because those results were weaker than our U.S. results, which is counterintuitive given the results that we've put up in our international businesses over a period of time, but well understandable given that volatility.

Our Corporate and Investment Bank is about 60% outside of the U.S.

As I look at our competitors, the highest ones are in the low 40%, so there is a meaningful mix difference between the two of them.

So all in all I would say we feel very good about the performance of our capital markets business and our GTS business.

The pipeline numbers are at record levels right now, Mike.

I say this and then I sort of make also the comment that given this volatility, as you know having covered the industry for a bit of time, that if the markets all remain choppy it will be difficult for all that to get executed over time.

But right now continues at real levels.

But make no mistake, we consider our international businesses to be a real and perhaps (indiscernible) defining strength of Citigroup and over time do extraordinarily well and given what's going on in the international markets did extremely well and we're very proud of them this quarter.

Capital markets in the month of June, was that a continuation of May?

Do you see more trouble for that area ahead?

I would say that capital markets in the month of June was a bit better than they in terms of the bottom-line impact, but it was quite a bit worse than it was in March when you think about some of the comparisons as you look at them.

And July I don't have to tell you has certainly not started off at rip-roaring levels and we see the volume could drive up a bit.

A little bit early for the summer slowdown that we typically see and certainly we believe all related to the volatility we're seeing in the capital markets.

Than one separate question.

Your operating leverage on a linked-quarter basis is still kind of flattish.

You may agree or disagree, but at what point does this record branch opening translate into positive operating leverage like on a linked-quarter basis?

Mike, this is Chuck.

I think that the way to think about that or at least the way I think about it is that a substantial portion of our revenues are under pressure from the outside environment and that combined with our investment spending and especially some of the mix shift toward CIB revenues in the quarter with the higher comp rates impacts the sequential operating leverage.

In terms of your question as to when is that over?

It takes a couple of years for the branches on average -- some are shorter, some are longer -- but a couple of years for the branches to generate breakeven revenues.

So it is a couple of years of the investment spending before we get up on the curve, which then balances out.

Does that answer your question?

Kind of.

So we need to wait until 2008 to see the positive outcome of it?

Because it has been a couple years already for the ramp up in investment spending.

And then I guess a related question, how much of the investment spending is the branch openings?

Okay, let me -- what I didn't hear Chuck say was that you have to wait till 2008.

No, I didn't say that.

It depends a little bit on that 45% of revenues under pressure, but in terms of the investment spending as a separate component, that is going to take a couple of years on the retail branch side for us to come up on the curve.

Obviously some of our investment spending relates to the CIB, which uses balance sheet but has a positive EBIT effect in the short run.

So it is really the investment spending is a mixture of things and I was really commenting just on the consumer branch openings.

And I would say that, Mike, to put a final point on the question, in this quarter just over half of the investments were in our consumer businesses.

More than one-third was in our international consumer businesses and the percent that has been going toward international consumer has been trending up over a period of time and we would expect to continue to trend up.

As Chuck said, revenues is one component.

We also very much need to spend the money that is needed for the volume growth that we're seeing.

It is very difficult to grow your good customer business as we showed you, the deposits in the lending 15% and take the expenses down at the same time.

So it is a decision that this management team is making to grow that very good customer volume to invest in that, to invest growing the business, to recognize that there is an interplay between the what is happening in interest rates and credits.

And as we talk about it is a management team, we see the flat yield curve, the tough interest rate environment as being a bad -- as being tough, but that the credit, which has an interrelationship with that obviously as being a good thing and it allows us to continue to invest in our business, to do very good things for the customer and to deliver what we view as very good results for our shareholders so that we can balance these things for the long-term growth and returns of the Company.

And those 45% of revenues under pressure, what are you referring to?

We're referring to the net interest income.

Okay, so conceptually you would say normalized revenues would be higher and therefore it is on track?

Is that a fair characterization?

Yes, you know I always hesitate with that normalization sort of word because what do you normalize for?

But what I would -- what again we do as a management team is we don't look at net interest income of in a vacuum.

We look at the entire higher income statement for the Company and know the interplays between them.

Again as a management team we feel very good about the business and the growth of the business and we feel -- and the prospects for the business we felt terrific about and feel good about the quarter as well.

Great, thank you.

Andy Collins, Piper Jaffray.

On the net interest margins down 14 basis points, I was just wondering how much was trading?

And then the final line of business, we can tell what it is on U.S. cards.

Is there any more clarification on the 14 bps?

Sure.

Andy, if you look at the NIM this quarter sequentially down 14 basis points, last quarter it was down 6 basis points first quarter over fourth quarter, it is fair to say that all of and a bit more of that move from 6 to 14 is due to the trading portfolio.

So if you want to call it core NIM, however you want to talk about it is not a lot better but just a tidge better.

And what we are seeing if you look across our U.S. businesses, our U.S. consumer businesses, in business by business you're going to see spread compression.

When you look at our international business, our international consumer business overall has seen spread expansion.

Our global transaction services business has seen spread expansion and so we have got some tougher news on NIM in the U.S., very tough news in the CIB, but again we don't manage to NIM there and much better news in the international markets.

Again NIM is something that we watch and monitor, but it does not also tell the whole story because of a mix shift we talked to you about last quarter where we've been moving for example from cards into mortgages.

As a relative portion of our balance sheet, you'll see pressure on NIM from that but an improvement in credit and so again as we look at and plant our businesses, we have to look at it more holistically, as one might say.

Okay.

On page six, as an unrelated question, on operating expenses is the 2% investment figure that you talked about, is that where most of the investments in the branches are coming or are there investments throughout the 16% increase?

How much dilution if you have calculated are we seeing from continued branch openings?

Yes, I would say that the investments that we're seeing, the 2 points is really sprinkled throughout the line items here.

So for example, a branch opening you would certainly see in other operating, but we would also include in that any of the advertising marketing expenses and you have compensation expenses, of course the occupancy expenses.

So you see it through a range of the income statement items.

For the Corporate and Investment Banking investments, those are really primarily technology as well as of course human.

The other, the real investment in the Corporate and Investment Bank because they tend to become as Chuck mentioned, EBIT positive pretty quickly is that we see compression on them in the early months and years of that or early months of that on our returns.

And so they tend to be more of what we would call a balance sheet investment.

For the '05 investments that we've talked to you about for the consumer group, as we look at the second quarter, they are really tracking very, very, very nicely to plan and on an EBIT basis, these things have just gone by, just passed by, are getting close to sort of breakeven on an EBIT basis, so still negative net income.

But all in all, all is performing to plan.

So we will continue to layer those on and the ones that we have will perform better and they will be on a pretty steep S curve and then we will layer on additional ones to drive very good growth in this business.

Okay and finally, the reserve release on the consumer side, how much of that was really the lower bankruptcies here in the U.S. versus how much do you think is related to changes in the law?

Is this more of a permanent change we're seeing or temporary?

Yes, a couple things.

I would characterize the release that we've seen in the U.S. as being a bit more min due as we looked at -- you know as Guy was asking about what our outlook is for the minimum payments in the U.S. as well as there is a bit on the Katrina, as well as -- and I sort of put this third -- as well as bankruptcies have performed somewhat better than the plan that we had.

I would say it is somewhat better on bankruptcies.

It is about versus our plan about $0.005 per share better than plan.

It is our belief that the bankruptcy, the impact of the bankruptcy legislation will lead to perhaps a 10% reduction in bankruptcies over time, so while we are at very low rates right now they will continue to move back up and that for some number of years bankruptcies will probably be at 10% lower than they otherwise would have been.

So it is a real benefit and certainly the pain for last year as we all remember but a real benefit that we have seen that we expect will continue for a long number of years.

Great, thank you.

Glenn Schorr, UBS.

Just a quick follow, Sallie, on the NIM comments.

You helped explain how much came from the trading side.

Just curious, if you look at total trading assets there, flat, maybe down actually a little bit sequentially, function of mix, function of maybe average was higher during the quarter?

Oh, in terms of the trading assets?

Yes.

That is as you can imagine managed very dynamically and so we have limits that we give the traders.

We have balance sheet that we are provided for the Corporate and Investment Bank and that Bob Druskin in turn provides for his businesses and they manage down to the desk level.

So the trading assets move, I wouldn't take any movement on the balance sheet that touches on the quarter end as being of any significance as (multiple speakers).

Sorry Sallie, the question was just related to your comments on the 14 basis points of NIM compression, most of it being related to trading activity?

Yes.

Okay, sorry.

I'm sorry (multiple speakers)

I'm just asking how -- if the accelerated NIM compression on a sequential basis was more related to trading activity, is it a function of mix inside the trading?

Because the trading assets were actually down in the quarter.

Sure.

It is going to be movements in that.

The best way to look at the trading, Glenn, is to take the net interest income and the principal transactions and combine it.

Depending on what type of trade is done at any point in the quarter you'll see a benefit in net interest income or you'll see a benefit elsewhere.

And it happens this quarter.

It could be different next quarter, three quarters from now, 12 quarters for now.

It happens this quarter there was compression in the net interest margin.

We have in prior quarters seen movements up and I actually would read very, very little if anything into that trading NIM.

Okay, other question just if you few can just remind us in private banking, you had revenues up 7% year-over-year, but income down 15 and the comment was related to the onshore buildout.

Where is that and how expansive?

In the private bank, it really is something that is occurring around the world.

Brazil, India, the UK.

It is across the regions as this bank which has been primarily an offshore business we are moving and growing to be more onshore.

So as a result of that, we are hiring bankers quite aggressively in building that out, which as a result does cause some pressure in the results if you strip out the Japan results from last year.

Okay, then one small follow-up.

In Smith Barney just the $5 billion outflows, is that something related to tax season or is that a little bit Legg Mason integration?

Yes is the answer to both.

We typically do not see outflows in the tax season, but we did -- the combination of that and a pickup in attrition in the business related to Legg Mason still within the projections that we had at the time of the acquisition had lead to that.

All right, thank you both.

Jon Balkind, Fox-Pitt.

Just to revisit the margin question, I understand the impact on trading but it also looked like your overall loan book yields were flat linked-quarter and that seems to be U.S.-driven.

Does that imply that the outlook for margin going forward is going to be more impacted by the overall core consumer businesses?

Then second, on your commercial loan growth that has been pretty material over the last two quarters, could you just talk a little bit about where that is coming from and what you expect going forward?

Okay.

In terms of the net interest margin, we sort of touched on this a bit as we were talking about what is going on in the cards portfolio.

You saw the yield coming down there as the mix within the U.S. cards portfolio has shifted to more of a transactor base and less from a lending base, a little bit more up-market in some of the new products.

I also touched on the issue of the change in the relative balance sheet share between cards, for example, and the mortgage business in the U.S.

As you break down -- you have mix shift sort of layered on mix shift.

As you break those things down, that is causing what is a compression in the yield on the loans, which you have rightly picked up, and which again is not something -- given that it is mix-driven it is not something that -- certainly our businesses are competitive but it is not, gee, it is a pricing issue by any means.

It really is a mix issue and so over time as we think about the net interest margin, clearly a lot of different things that go into it.

Certainly one of them is the mix that we see.

The other is going to be -- mentioned we have gone over trading at length, which we cannot forecast.

Certainly the competitive environment and interest rates.

For us of course it is not just the U.S. interest rates, but it is interest rates in the 10s and 10s, the hundred countries in which participate.

In terms of commercial lending growth, I can tell you we are really seen around the world.

Many areas we have strength not just in our strong international markets but we also are seeing strength in the United States.

So it really is around the world for us, with no region showing disproportionate share of the growth in that portfolio.

Great, and then just one quick follow-up.

In terms of Taiwan, do you think the issues in the card business there are behind you?

Then in terms of Japan consumer finance, what are your business leaders there sort of expecting in terms of the lending rate issues?

How you going to respond to that?

Let me take Taiwan and then maybe Chuck will have a comment on what is going on in Japan.

In Taiwan, while it did cost us in this quarter which one is never happy to see it was about a $60 million pretax credit cost in the second quarter.

That compares to $100 million in the first quarter, certainly not happy to have that increase in the NCLs and further additional increase in the loan loss reserves.

I will tell you that as a Company we are really very pleased to see the performance of that business in comparison to the competition.

We have right now about a 14% gross credit loss.

The industry is running at 40%.

So this was a business in which we saw that the cash cards were going to be trouble and we actually -- we pulled back from that quite a bit, although we are seeing some collateral fallout.

I would say it's too early to call any change there.

We have had a couple of months of results that would make us feel modestly, moderately, slightly encouraged, but by no means would we call the turn but are managing our way quite aggressively through it.

Japan, the changes in the Gray Zone legislation over there are not yet done.

Estimates on timing range from the fall to early next year.

And depending on how substantial the change is, the business, the whole business, the industry business will shrink.

Within that I think that quality players, higher quality players, more reputable players will tend to do better.

So I expect our business will be a good business there.

The question is what size the industry will be after the changes happen, but right now it's too early to predict which way that's going to go.

Great, thank you very much.

Betsy Graseck, Morgan Stanley.

Chuck, one question.

You had indicated in your comments that on the second half of '06 you are anticipating that the most important thing for you is to continue to be investing in the business.

It would just be helpful if we could understand if you are anticipating that that investment rate would be at a faster clip than what it has been over the last three to four quarters.

Yes, sure, Betsy, thank you.

What I tried to say was that we had five initiatives, the first of which was to continue to invest, but there are a number of others.

I don't want that to get lost.

In terms of the investment itself, I think that in some areas you sill see an increase in the rate of investment.

As I said, the retail bank branches in the U.S. will increase the pace of that.

Others we're a little bit ahead of the pace and in some of the investment activities in CIB, it is actually a positive on the bottom line.

So the mix of all that will certainly change and there may be some increase in the level, but again for the year as I said in December, for the year we expect the envelope of investment activities to be in the same EBIT range that we had last year.

And then you have been obviously tracking the investment spend in progress on a very close basis, on a month-to-month basis at least.

Could you talk about any changes that you might have made during your review process as to --?

Yes, that is a very good question actually.

We do track it not only monthly, in some cases weekly, in some cases daily.

Every quarter we go through the investments and we will be doing that in another week or two and at that point I would expect we would shift some of the mix.

We are not irrevocably committed to those that are not progressing the way we would like in general.

I think the investments are proceeding very well and the bottom line is going to show up pretty well, but obviously within that we would expect to shift some of that.

So some will be a little bit deemphasized, others more emphasized as we monitor the results very carefully.

And as you think about the returns on the investments, Sallie, you mentioned that on an EBIT basis the '05 investments are positive now, although still negative on a net income basis.

Can you give us a sense of the timeframe to positive impact on net income?

I'm sorry, I beg your bigger pardon, Betsy.

What?

The timeframe from current to when the '05 investments are likely to start to turn positive for net income. (multiple speakers)

It's different in each category.

Yes, I was going to say you can't really say overall.

It is different in each category and given that we have had good investments in our Corporate and Investment Banking business, there will be volatility so that this quarter for example where we made the investments did particularly well.

Next quarter may do particularly even better or be down a bit, so I think it all depends.

But as you recall for the consumer finance branches, those are breaking even for us within a year.

For the banks, bank branches we opened, they are taking a bit longer.

For the Corporate and Investment Banking investment initiatives, they tend to turn positive very quickly, but again tend to be more of a drag on the ROE over time.

So the combination of all of them should help us hit a very good run rate so that we can continue to deliver a good sustainable earnings growth for you.

Okay, then one little nitty question.

I know you talked about this with Guy, but there was higher credit costs in the CIB in part a function of funding, increased long growth and commitments, but also you updated your historical data used to estimate certain losses.

I'm just wondering on the latter part of that was there anything -- what drove that change?

No, because as we discussed with Guy, we have lots of Ph.D.s here and they have lots to do.

One of the things that they do is we continually refine these models.

It is as simple as in some cases we got another year's worth of information, right?

It is as simple as in some cases some of the external rating agency information that we use was updated as well.

So we combine all of that as we gather more and more information so that we can have -- we want to be adequately reserved, we want be correctly reserved, and as we gather new information, we will make changes every time those things get updated.

So that is on an ongoing basis.

Was there anything in the quarter that would lead you to have highlighted it in this quarter's release?

Well, because a year's worth of work was finished, right, so as we got into the quarter, we updated it and it did cause a swing which caused us to increase the allowance somewhat in the CIB because that number was of size enough that you could see it, we highlighted it for you.

But in general again as you look at the Corporate and Investment Banking credit, as you look at the consumer credit, I would characterize it as being stable, favorable, very good credit.

But whereas we have in past quarters probably characterizing it getting a little better, getting a little better, I would say that we're seeing real stability at very good levels.

Thanks.

Jason Goldberg, Lehman Brothers.

Most have been addressed but not the (inaudible).

With respect to the margin, can you just give us kind of the impact of cap markets in Q1?

I go to the incrementally impacted linked-quarter.

Can we just get a sense of comparison versus Q2?

Yes, let me look at this.

The capital market impact over the past couple of quarters has been a bit more [up] than it has been on the noncapital markets, so it was not as noticeable, the shift wasn't as noticeable.

I don't have the exact numbers with me but you can think about it being a bit more of an impact on the first quarter and volatility as I look back over the numbers from then.

But here again this was enough of a difference as we noticed it in the second quarter over the first quarter that I wanted to highlight it for you.

Okay.

Maybe you kind of talked about U.S. consumer in general being I guess under pressure and I guess really talked to you year-over-year.

Could you maybe just talk in terms of the -- given U.S. consumer buckets with respect to margin in terms of increasing or decreasing with respect to the major categories?

Sure.

I would say in cards on the managed business we have seen as you look through that margin you're going to see that the pressure appears to have increased.

We talked about that cost of funds as well as the pricing there.

Remember we have to look at that also with credit.

I would tell you in our retail distribution businesses the Citi Financial branches, the net interest margin looks a bit better second quarter over the year-over-year as we had some treasury actions in that business that have rolled off, so we have a bit of abatement in that pressure.

When you get into our lending businesses and particularly those where we don't have as direct relationship with the customer, you do see pressure there, so real estate for example and the real estate lending, which in many cases is through our bank branches, through Smith Barney, but others of it can be a bit more arm's length.

The pressure there is pretty intense and has been for a period of time.

So there is no abatement of pressure in that, but student loans, student loans is pretty stable.

So going through all of those, commercial business, the commercial business is one where it has been under a lot of pressure and we're hearing from the business people that while it doesn't appear to be getting any easier, it is not upticking.

In our cards business -- I'm going to go through international ones as well -- international cards you are seeing an improvement in the spread.

Some of that is credit cards coming on the books but that continues to be a very good business.

Citi Financial, a little bit of net interest margin pressure quarter-over-quarter versus where we were year-over-year.

That is driven by Japan, which is a high NIM business for us, having less share of the balance sheet as the other businesses have outgrown that business.

Then a good result in our international retail banking as well.

And also GTS, which has had spread expansion continues to see that.

So all of all it is mixed, when one looks at net interest margin.

I think the best way I can characterize it, U.S. mixed in terms of the pressure.

We look at that with regards to credit as well.

International continues to have some expansion as the GTS and the trading is going to be volatile.

Okay, thank you.

Then just unrelated, in which line item did the MasterCard gain show up in?

The MasterCard gain is going to be in revenues; 47% of that $78 million is in our U.S. cards business.

We also have -- Mexico has got 22 of the 78 and then the smaller amount, the small amount, that's $5 million in U.S. distribution and some sprinkled in the other international cards businesses.

Is $78 million pretax or after-tax?

$78 million is after; $121 million pre.

Super, thanks.

Stephen Wharton, JPMorgan.

So my question kind of just revolves around the longer-term goals, some of your patience in waiting for some of these investments to pay off.

You mentioned at the beginning your goals as you have laid them out and yet this particular quarter everybody normalizes differently.

You earned about $1.05, up 15% year-over-year, but if you strip out all the reserve releases and the gains, it looks to me like the core number is closer to $1 or maybe a little bit over that.

And on an originally reported basis, you're talking maybe 4% or 5% year-over-year EPS growth.

Now I understand that there is a lot of margin pressure, which doesn't seem like it is going to ebb any time soon, but that to me would seem to be below what the franchise is capable of and certainly what you're targeted.

I know you mentioned continuing ops, but to me that is not the right way to look at it because you ask the investors to support you divesting in those businesses so then I want to see that that capital is reinvested and allows you to earn a rate of return and a growth rate that is at least to your target.

So how do you think about that and when do you think you can get back up to a kind of -- originally reported year-over-year earnings growth rate that may be closer to the high single digits?

If I can, Steve, let me jump in and take that first at least and let Sallie supplement it.

If you take out all the good stuff and leave in all the bad stuff, you end with a much stiffer number obviously.

We don't look at it that way.

Continuing ops was up 11%.

Diluted EPS was up 8% and that I think is the right way to think about it if you don't account for our use of capital to buy back shares.

So you are simply comparing simple net income year-over-year, then I can't really believe that that's the right way to look at it.

We did use the capital for something and so you can look at the diluted EPS number of 8% instead of continuing ops of 11 if you want.

But to look at simply naked net income growth year-over-year, I don't think is the right way to think about it.

I was quoting actually EPS numbers but maybe it's because I am normalizing your EPS result lower because of the reserve releases and the like in the gains.

And again as I said, if you take out all of the good stuff and leave in all of the bad stuff you'll end up with a lower number obviously.

The 123(R) charge which the SEC dropped on the street at the beginning of the year is something that nobody would plan for.

There are a variety of things like that but again I think the right way to think about it is that in a business like ours and certainly in any large business there are a variety of good things and a variety of bad things.

And the question is do they tend to balance out over a period of time?

If you look at it sort of with one eye closed and we look at one side of it, I think you're going to get a result that we certainly don't manage to and one which would be hard for us to respond credibly too.

That is just not the way we think about the business.

Let me add to that.

As I look at the mix in the credit fees, it is not all sort of an accident but as Chuck would say, sort of something fell in front of us on the street and it just happened to be there but instead that certainly there is in a BK impact on the credit in the quarter versus last year.

As I said, we expect some of that to be a sustained good impact for us over time, but in addition, about half of it is driven by mix shifts within the business.

So to look at all of it in a glob might not be the right thing and as you and I have discussed looking at that interplay, that credit, yes, you can say you subtract it away but there is a pretty good probability that when credit gets tougher, the yield curve will not be flat and there will be an interplay between those two things.

And what has happened in the past as the credit gets tougher, taking just the U.S., the Fed will ease.

There'll be a steeper yield curve and so all of a sudden we will have more revenues, people will feel better about that and we'll spend a lot of time talking about credit and what is going on in credit.

So there is an interplay.

There is a mix issue and again it is not a particular accident that if you have the gain on the sale of the branches in New York and we put that into the pot with the other opportunities we have, it should not be surprising you will see the investments pick up.

We have to manage the entire income statement and the returns that we give you as shareholders and it probably would not be the smartest thing in the world for us to let that just have that there, let it all flow through.

But that if you take that and invest it back in our businesses for investment opportunities that we feel are highly additive to the shareholders and are things that we at Citigroup, only we can do given our global platform like what no one else has.

These really are opportunities that we have while again returning what we view particularly given some of the volatility in the markets to be very good results for the Company.

All right, thank you.

Meredith Whitney, CIBC World Markets.

Most of my questions have been answered but I guess I'll ask a couple follow-ups, which is on the card side, just a point of clarification.

If you net out the $4 billion in card growth from Federated, then you're looking at declines in managed receivables.

I know you guys talked about organic growth and momentum builds, I'm just wondering is that math right or what am I not looking at?

As I net that out, if you look at the organic managed build, Meredith, I get that the slight increase in the cards receivables growth becomes a slight decrease.

While that certainly is not good news, I would note that versus the first quarter and the fourth quarter where on an organic level we saw declines in the order of 4% that it is a very nice sequential year-over-year first quarter -- second quarter versus second quarter of last year, first quarter versus first quarter of the year -- it is a very good improvement.

And as Steve and team and Vic have done a lot of wok on the cards business to sort of turn that battleship, in the very beginnings of turning that battleship, is certainly early stages but nice to see.

Okay.

Just one of two last questions.

Exclusive of the outflows related in part to Legg Mason attrition, can you give more of a feel for what the retail investor, where he is right now and how would you react to how he had reacted to the volatility of the last three months?

Sure.

I would say the individual investor has reacted not so much over the past three months maybe but the past month as the individual investor typically does, which is transactional revenues have weakened a bit.

You have seen this.

You can see a direct relationship between this and volumes on the stock exchanges.

They tend to be a very good proxy for what is going on there.

And so what we found t is they have seen the ups and downs before.

There is not a panic.

The outflows are not that the people are pulling their money and putting it into short-term money markets to have some kind of enormous flight to safety, but instead I would say that it is manifesting itself into a bit quieter of an environment right now which we are seeing also in the transactional numbers.

In part this is the shift, you are seeing a shift more in the fee-based, which is a longer-term trend we have seen at Smith Barney and for those investors, they really are staying put in the fee-based.

Okay and then my final question is just to follow up on something with Chuck which is on the ALM regulatory usury fee issue -- that's a U.S. expression -- but it is a big deal in the press and the press is reporting like a fait accompli.

So you had said that is a fall or early next year issue.

How big of a deal will this be to your business?

Meredith, you're probably referring to the FT article a week or so ago.

That was a report of an advisory commission or a banking commission.

I don't have it exactly right but it was a report which now has to be taken up by the legislature in Japan, by the Parliament.

The question is when will that happen?

Will it happen in the fall or in early spring?

As you know, the government is changing in Japan on a planned basis this fall and the real question is how will impact the timing of it?

As I said before, the impact will affect the industry as a whole and make the industry as a whole either a little smaller or a fair amount smaller.

And when that happens I believe that the better quality players, the higher reputation players, will tend to do very well and so I think our business will be good there.

The question is what size the industry will be that we will be operating in.

That is not a question of your margins getting cut by one-third?

Well, obviously rates will go down, but I think the size of the business is really what I am focused on more than the margin because we will be able to do very good business even at a reduced ability to charge customers and the question is what size will the business be?

All right, thanks so much.

Operator, if I'm a jump in -- this is Art Tildesley, we are running a little bit short on time.

So if I might ask the next two or three people who we can accommodate to keep their questions to perhaps just one and then we will turn it over to Chuck for some closing comments.

Thank you.

Joseph Dickerson, Atlantic Equities.

There's no problem.

You have answered all my questions.

Thanks very much.

James Mitchell, Buckingham Research.

I'll try to keep this short.

Just on the expense side excluding -- you talk a lot about year-over-year growth and explaining that and a lot of it had to do with comp, but if you look at noncomp on a sequential basis, it was up around 6% sequentially.

Obviously, can you just sort of talk about what drove that?

Was that mostly investment spending or were there other things in there that we should consider?

Because when you look at revenues being relatively flat, you would not think volume drivers or other things like that would've been driving that higher.

So I'm assuming it is mostly investment spending.

It is.

It depends on how you want to find some of these, but you're also you'll see advertising and marketing moved up from the first quarter to second quarter, so that will be a timing issue as to when for example cards, which is our biggest advertiser, will be in the market doing some of the advertising.

That will have seasonal affects to it.

They tend to advertise less in the first quarter sometimes and to move up through the course of the year.

As well as you'll see variability.

I see variability in some of the legal costs for example and some of the communication expenses.

So it depends on the mix of business as to which lines are moving up at any point in time.

Some of the brokerage costs have moved up as well, but in general it is a lot of investments.

It is in advertising and marketing but no other big items that are there.

Do you think we have hit a run rate here that is sort of where you view it a sustainable, or should we expect that growth rate, the rate of growth in investment spending to continue?

Well, as Chuck had mentioned, what our goal is for this year is such that the bottom-line impact to the shareholders, EBIT impact will not be any greater this year versus next year -- I apologize, Chuck, this year versus last year.

We did see a step up in the expense line second quarter over first quarter.

I would expect that we will continue to see investments stronger in some areas, less -- sort of pulling back in others, but that the EBIT impact will not be any more although the expenses may move up depending on which part we are investing in at any point in time.

Okay, thanks.

Howard Mason, [Alliance Capital].

My question has been answered.

Thank you very much.

David Hilder, Bear Stearns.

Thanks.

All my questions have been asked and answered.

Art, before we sign off, I'd just like to take a moment to say thank you to my management team and to the men and women of Citigroup around the world who also listen to this call.

Despite all the turmoil we see on the news and in the markets, the Citi delivers and we deliver because of the tireless efforts of our team.

I have every reason to believe based on their efforts that we will continue to deliver the kinds of results our owners expect from us and that we are delivering now and we're looking forward to the remainder of the year with a great deal of optimism and enthusiasm.

So team, thank you.

Good job.

Art?

Thank you.

Sorry, my microphone was not turning on.

My apologies.

Thank you all very much for joining us today and as always, I apologize for the length of the call.

If we have not been able to answer your questions, please call us in Investor Relations.

Otherwise that concludes this call.

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

You may now disconnect.