花旗銀行 (C) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Citi's first-quarter 2007 earnings review featuring Citi Chairman and CEO, Chuck Prince and CFO, Gary Crittenden.

Today's call will be hosted by Art Tildesley, Director, 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.

Also, as a reminder, this conference is being recorded today.

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 today for our first-quarter 2007 earnings presentation.

We are going to walk through a presentation and that is available on our website, so if you haven't downloaded that, please do so now.

We will follow our usual format.

Chuck will start with some opening comments and then Gary is going to take you through the materials and then we would be happy to answer any questions you may have after that.

Before we get started, I would 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 you, Chuck.

Art, thank you very much and good morning, everybody and thanks for joining us this morning.

I want to make a few comments before I hand it over to Gary and I want to put those comments in the context of the four priorities I have set out for Citigroup in 2007.

You have heard these priorities before.

I want to describe this quarter's results in that context.

Our first big job in 2007 is to drive growth in our U.S.

consumer business.

You will recall the disappointing trends we have had there for several years now and in the second half of '06, we began to see some improving trends in revenue growth.

You remember the chart I used in December and you will see an updated version of that in today's set and I said in December that I was cautiously optimistic about how that turnaround was going.

This quarter, I am pleased.

The trends seem to be continuing.

We seem to have the same turnaround trend that I saw coming out of the fourth quarter.

U.S.

consumer loans, deposits and assets under management all grew at a double-digit pace.

Revenues, which had declined almost 9% in the first quarter a year ago, increased 6%, up a touch more than the 5.8% in the fourth quarter.

Excluding the Master Card gain, revenues were 4%, but still a positive result in a business that had suffered for several years on the revenue side.

On the expense side, expenses were still quite moderate even though we opened another 51 branches during the quarter and so I would say that I still remain cautiously optimistic as we look ahead to the balance of the year, but job one, we are making some progress on.

Our second big job, to reweight the Company so that the non-U.S.

consumer part of the businesses is a larger part of our revenues and earnings and we are not so concentrated in that one business.

That job also made good progress this quarter.

Our international revenues in total grew 18% compared with a total U.S.

revenue growth of 12%.

Obviously a big part of the 12% was the capital markets business.

And on a numbers basis, U.S.

consumer revenues were about 30% of total revenues this quarter versus 33% a year ago.

So the switch that we are engineering is working and I am especially pleased with the growth that we have had in Europe and Asia with revenue growth of more than 20% in each region.

It was also a very productive quarter on the acquisition front as it relates to the second job with a real focus on expanding our international franchises.

We announced or closed several acquisitions helping with this reweighting process.

The announcement of the acquisition of Egg was this quarter, the world's largest Internet bank.

We also, as you know, announced the offer to acquire 100% of Nikko Cordial in Japan.

We also closed on the acquisition of Grupo Uno in Central America and [Cloture] in the U.K.

And we closed on our strategic investment in Turkey and on the acquisition of the U.S.

mortgage business from ABN Amro.

We also announced just this last week the acquisition of the bank in Taiwan, the Bank of Overseas Chinese and the acquisition of Old Lane Partners where I am very happy to welcome Vikram Pandit and his colleagues to our team.

You can see from that weighting of acquisition activity that we are focused very much on deploying our capital into the international space.

Our third big job is effective expense management.

Now we spoke a lot about this last Wednesday with the very specific actions and substantial savings identified through the review led by Bob Druskin and I emphasized then and I want to emphasize again this is in not a one-time effort, not a big bang.

This is the start of a continuous process of improvement.

Bob talked about that and how we will see this working throughout future quarters.

This quarter in total, we reported expense growth of 17%.

That includes the charge.

If you back out all of the one-timers, all of the press release disclosed items both in revenue and in expense, you end up with revenues up 12% and expenses up 10%.

That is without any one-timers on either side of the aisle and so obviously on that no one-timer basis, positive operating leverage for the Company as a whole.

You know we have been working on this for a long time.

It has been quite a challenge in some of our businesses and it feels very good to me to see that progress.

We are delivering on our plan.

The plan is working and it is working without any help from the yield curve.

It is working with the headwind on revenues from Japan consumer finance that we will have through the third quarter of this year and it is working without any real benefit yet on expenses from the Bob Druskin-led projects.

So I feel very good about the results.

As I said in December, I have given up on the prospect of predicting operating leverage and I am not predicting it, but I said then and I say now that our plan for the year provides for positive operating leverage in all of our businesses.

Our fourth big job this year is to manage through the credit cycle.

We are a bank.

We are in the risk business.

We are not immune to credit cycles.

We are not immune to credit deterioration and we are managing this side of our business very carefully in light of that external environment.

I feel good about the composition of our portfolios, not only in the corporate and sovereign area, but especially in the U.S.

mortgage area where we have avoided the riskier products at some cost to revenues in prior years and I think we are seeing that play out in the results we have on the credit side.

Gary will take you through the details of that in a moment including the increase in reserves to stay ahead of the trends we see in the credit environment, but I assure you that we remain very diligent in managing our credit exposures.

So in sum, I feel very good about the progress we are making.

We have clear goals and we really see demonstrable evidence that we are on the right track and we are making good progress.

We had good revenue growth driven by strong increases in customer volume.

Before I finish, I have to say a word of thanks and gratitude to our traders.

I am proud of what our team did.

Tom Harris and the people in fixed income; Randy Barker, Geoffrey Coley, Paco Ybarra, [Jamie Farice].

Running equities had a terrific quarter.

I am proud of them.

I am proud of what they did this quarter.

I am proud of the team in general, but this was really an outstanding showing.

And with that, I'd like to turn it over to Gary.

Gary has settled in very quickly.

I am very happy to have Gary on the team.

He has become a valued partner already.

I am looking forward to a lot more to come.

Gary, over to you.

Thanks very much, Chuck, and thanks and good morning to everyone.

We appreciate you joining with us.

I look forward to having the opportunity to meeting many of you over the next few weeks.

As Art mentioned, there are slides available to you on the website and I'm going to go through each of these slides and we'll start with slide number one.

Slide 1 shows you our consolidated results for the quarter versus the first quarter of 2006.

To summarize, our net revenues grew by 15%.

Expenses were up 17%, including the $1.4 billion charge that we announced last week.

The cost of credit was up 77% and I will come back and review that in some detail in a minute.

In spite of the increase in credit costs and the $1.4 billion charge, our pretax profits were down by 3%.

Our effective tax rate, however, went from 21.5% in the first quarter of 2006 to 26.9% this quarter.

I will also explain that in just a few minutes.

Net income from continuing operations declined 10% and EPS declined by 9%.

And return on equity was 17.1% or if you exclude the structural expense review charge, it was about 20%.

The results for the quarter include a number of items that I want to highlight.

In the first quarter of 2006 against which we compare ourselves, we took an after-tax charge of $398 million.

That was related to stock grants that were awarded to retirement-eligible employees in January of 2006.

And we had a $598 million tax benefit on a continuing operations basis.

That was $657 million on a net income basis related to the resolution of a federal tax audit, which reduced our effective tax rate to 21.5%.

This quarter, we had four items that I would like to highlight.

The first is the gain on the sale of Master Card shares of $171 million after-tax.

Second, we adopted FAS 157, which resulted in a $135 million after-tax benefit.

Third, we had certain APB 23 tax benefits of $131 million that are described in the press release and fourth, offsetting these benefits, we took an after-tax charge of $871 million for our expense restructuring that we discussed with you last week.

I am going to turn now to slide number 2.

This shows a five-quarter trend in some of the key drivers of our business.

As I said, net revenues grew 15% this quarter.

In the U.S., revenues were up 12% and internationally, revenues were up 18% as we continue to grow our international businesses faster.

Excluding the items I just highlighted, which totaled $670 million, revenue growth was still strong at 12%, reflecting continued momentum in the key drivers of each of our businesses.

Drivers of net interest margin for example showed strong growth.

Consumer loans were up 10% in the U.S.

and 16% internationally.

Corporate loans were up 10%.

Consumer deposits were up 20% in the U.S.

and 7% internationally.

Credit card purchase sales were up 6% in the U.S.

and 25% internationally.

Drivers of fee-based and transactional revenue also grew nicely.

Assets under management were up 12% in Global Consumer and 52% in client AUMs in our alternative investment business.

In our Global Wealth Management business, assets under fee-based management grew 13%.

In Investment Banking, we ranked number one in global debt underwriting, number two in completed M&A and number three in global equity underwriting.

I am going to turn now to slide number three.

Slide number three is a bar graph that shows the eight-quarter sequential trend in the change of our net interest revenue.

The table at the bottom shows you the net interest margin for the entire Company for those same eight quarters.

As it is clear from the graph, our net interest revenue moves around quite a bit from quarter to quarter driven by the volatility resulting from our trading activities.

As you know, our trading businesses are not managed to target a specific net interest margin, but instead to drive overall revenue growth.

As I mentioned earlier, we had strong volume growth in all of our businesses, which resulted in a fairly steady increase in net interest revenue over the last eight quarters.

At the bottom -- as the table at the bottom of the page shows, net interest margin expanded by one basis point sequentially.

Excluding the impact of gray zone, however, net interest margins declined by 14 basis points sequentially with slightly less than half of the decline in our trading portfolios.

We continue to see pressure on net interest margin as short rates are higher and the pricing environment remains very competitive.

Volume growth, however, continues to drive net interest revenues higher in spite of this margin compression.

I am going to turn now to slide number 4.

Slide number 4 shows the impact of our expense growth of three items that I would like to highlight.

The first is the impact of the $648 million pretax FAS 123(R) charge that was taken in the first quarter of 2006.

That resulted in a 5% comparable benefit for the quarter as you can see.

As we announced last week, we also booked a $1.4 billion charge in the quarter related to the structural expense review, which added 11% to the growth in the quarter.

The actions we are taking now will create a more streamlined organization.

They will reduce our future expense growth, improve how the Company operates and generate savings that can be used to fund ongoing reengineering to drive revenue growth.

Compensation accruals related to the revenue impact of adopting FAS 157 was a 1% contributor to our expense growth or $181 million.

Adjusting for these three items, our expense growth for the quarter, as Chuck mentioned, was 10%.

This represents the underlying growth rate of our expense base and comprises our business as usual expenses; investment spending and any impact from acquisition and for foreign exchange.

Those two items, acquisition and foreign exchange, contributed 2% of the 10% revenue growth.

Our business as usual expenses were up 8%.

The bulk of which is compensation cost increases related to the revenue growth in the quarter.

This also includes the impact of incremental investment spending, which we now consider to be part of our ongoing expense base.

As we have said before, it is expected to be half of the 2006 level for the full year of 2007.

I'm going to turn now to slide number 5.

This slide shows the year-over-year growth components of our total cost of credit and the key drivers within each of the components.

We anticipated that credit cost would be a difficult comparison for this quarter and it was.

While conditions are generally stable, there are a number of factors that affect this comparison year over year.

The combined result of these factors was an increase in our total cost of credit of $1.3 billion year over year.

First, as the chart shows, we had a net release of $154 million in loan loss reserves last year due to the particularly strong credit environment at the time and lower than expected bankruptcy filings in the U.S.

Net credit losses, as you can see in the middle bar, were higher by about $509 million.

Almost all of this was driven by our global consumer business.

The key drivers, as you can see inside the bar, are the gray zone in Japan, organic portfolio growth, acquisitions and some deterioration in our second mortgage portfolio.

The third component is nearly a $600 million increase in our loan loss reserve.

There were four major drivers of this increase.

First of all, we had portfolio growth in all of our businesses.

Second, we had a $286 million increase in our markets and banking business that was driven by higher commitments to leverage transactions and an increase in our average loan tender reflecting the success that we have had in supporting those businesses.

Third, in our consumer businesses, a change in the estimate of loan losses that are inherent in our portfolio, but are not yet visible in our credit metrics, was taken and then finally, as I mentioned, we saw an increase in delinquencies in our second mortgages.

So how should you think about the cost of credit going forward?

Broadly, the credit environment remains good, but we continue to expect some deterioration in credit as the year progresses as the industry is coming from extremely low loss levels in the last two years.

Next quarter, we will again see a challenging year-over-year comparison as we had $210 million in net reserve releases in the second quarter of 2006.

In the third and fourth quarters of this year, the year-over-year comparisons should improve.

Net credit losses and reserves should continue to grow in line with our portfolio growth.

Year-over-year comparisons could reflect, as they have in the past, some volatility to specific events.

Additionally, our reserves will continue to reflect our best estimation of inherent losses in our portfolio that are not yet visible in our credit metrics.

I am going to turn now to slide number 6.

Slide number 6 provides some additional color on our consumer portfolios.

In specific, the top two tables show the loan to value ratio on the rows of the matrix and the FICO comparison on the columns of the matrix for the first and second mortgage portfolios in our U.S.

consumer business.

The bottom panel on the chart displays consumer net credit losses and loan loss reserves as a percentage of loans.

In our first mortgage portfolio, as you can see from the grid on the top left of the page, the quality of the portfolio is very good.

Less than 10% of the portfolio has a FICO score less than 620 and greater than 80% shown in the four cells in the bottom right-hand corner of the mortgage grid -- of the grid.

In our second mortgages, none of the portfolio has a FICO score of less than 620.

In fact, 96% of the portfolio has a FICO score of greater than or equal to 660.

However, 34% of the portfolio has a combined LTV of 90% or higher.

You see that on the bottom row.

And this is the area where we are seeing signs of stress and we have built the reserves accordingly.

The graph at the bottom of the page demonstrates that our loan loss reserves and our net -- our NCLs as a percentage of the consumer loan portfolio have held steady with our historic performance.

Excluding the impact of gray zone, we have seen an improving trend in the ratio of NCLs to average loans.

I'm going to turn now to slide number 7.

Slide number 7 shows a number of our key capital ratios and our share repurchases this quarter, as well as a return on common equity.

The Tier 1 capital ratio in the first quarter was 8.2%, down from 8.6% at the end of last year, driven by the addition of goodwill and intangibles from acquisitions that we have recently completed and from the charge that we took this quarter.

However, the ratio has been fairly stable over the last five quarters.

Both the total capital and the TCE ratios have shown similar trends of consistency.

The leverage ratio, which is the ratio of Tier 1 capital to leveraged assets, has dropped to 4.7% this quarter driven by the addition of goodwill, intangibles and the structural expense review charge and also asset growth.

We repurchased $645 million of our stock during the quarter, less than in each of the previous four quarters.

Given the pace of acquisitions during the last three quarters and the opportunities we see ahead as we sit here today, we do not anticipate any further buybacks for the remainder of the year.

However, share repurchases will remain an important part of our capital management effort.

Return on equity, as I mentioned, was 17.1%.

20% if you adjust for the structural expense review charge.

Part of our job is obviously to continually monitor the balance sheet to ensure that we are allocating capital to the opportunities that we think are most likely to create value.

Now I'm going to spend just a few minutes on each of our major business lines and I'm going to start with slide number 8, which reviews the results in our U.S.

consumer business.

Revenues were up 6% as we continued to see positive results from our strategic actions.

Revenue growth reflects a $160 million -- $161 million or 2% benefit from the Master Card gain.

Net interest revenue improved 1% as 10% loan, 20% deposit and 1% cards receivable growth were partially offset by continued spread compression.

From a line of business perspective, a 14% decline in net interest revenue in cards was offset by a 5% and 12% improvement in retail distribution and consumer lending respectively.

Consumer lending net interest receivables reflects strong loan growth of 19% in real estate and 30% in autos.

Excluding the benefit of the Master Card gain, non-interest revenue was up 8%.

This reflected higher gains from the security sales -- from security sales and from previously securitized receivables and higher mortgage servicing revenues.

Expenses in the U.S.

consumer business remained in check and grew by 2%.

Excluding the favorable FAS 123 comparison, expenses would have increased approximately 3%, lower than the rate of organic revenue growth.

Credit costs increased by $569 million driven by the factors that I previously discussed.

Taxes were higher by $65 million.

The net result of the higher credit cost and the taxes offset margin growth of 11% and income declined by 12%.

Now slide number 9 is the chart that Chuck referred to in his comments.

It shows a 13-quarter trend of revenue growth in our U.S.

consumer business.

During most of 2004, we were growing at double-digit rates benefiting from the Sears acquisition, but excluding Sears, the underlying growth was much lower as indicated by the dotted lines in the bars and in 2005, the business was actually shrinking.

It is only in the last four quarters that we are seeing emerging momentum, both the year-over-year and sequential comparison.

While we have a lot of work to do, we are pleased with the positive trends in the business.

I would like you to turn now to slide number 10, which shows the results in our international consumer business.

Before I talk about the full business, a word on the impact from gray zone in this quarter.

If you look in the middle section on the left-hand side of the chart, you can see the financial results excluding Japan consumer finance.

International consumer revenues are up 20%, pretax income is up 6% and net income is down 6% as a change in tax rates due to the absence of prior year benefits caused a 12 percentage point negative impact on net income.

On a reported basis, including the impact of gray zone, revenues were up 14% driven by strong client activity, of which 2% came from the sale of Master Card shares.

The consolidation of credit card and the addition of Grupo Uno also contributed 4% to revenue growth.

Excluding the impact of these acquisitions and the Master Card gain, revenue growth of 8% was driven by strong loan growth and deposit growth of 15% and 6% respectively.

Card's average net receivables grew 28%.

Importantly, organic revenue growth in cards was evident in all regions excluding Japan.

Expenses grew 14% reflecting the consolidation of Grupo Uno and Credicard and our continued investment in our distribution network.

Excluding the impact of Grupo Uno and Credicard, expenses were up 8% in line with the rate of organic growth.

We opened 19 retail branches and 29 consumer finance branches in the quarter.

Credit costs were higher by $449 million, reflecting the results from Credicard and Grupo Uno, gray zone, portfolio growth and target market expansion in the Mexico cards business.

Additionally, while credit in Taiwan is improving sequentially, we continue to see pressure in the year-over-year comparison.

The net impact of gray zone, higher credit costs and taxes offset margin improvement of 16% resulting in a decline in net income of 16%.

I will turn now to the results from our marketing and banking business.

The business had a record quarter in revenue and income with revenue growth of 25%, which was broad-based across all products and geographies.

Chuck underlined just how strong the performance in trading was for example.

Market volatility during the quarter created trading opportunities and higher customer activity.

Including the adoption of FAS 157, revenues were up -- excluding the adoption of FAS 157, revenues were up 18%.

Fixed income and equity markets revenue improvement of 20% and 26% respectively were driven by strength across almost all product areas.

In our investment banking businesses, we remain number one in combined global equity and debt underwriting for the 22nd consecutive quarter.

We had record revenue results in equity underwriting, up 83% and in our advisory business, up 45%.

Our transaction services business posted record revenues of $1.6 billion with key drivers growing at mid 20% rates.

Expenses increased 7% as the absence of FAS 123(R) -- the FAS 123(R) charge of $354 million was offset by higher compensation costs resulting from higher revenues.

Excluding this favorable comparison, expense growth was approximately 16%.

As I mentioned earlier, the marketing and banking business had a net charge of $286 million to increase reserves in the quarters due to portfolio growth, which includes higher commitments to leverage transactions and an increase in average loan tenure.

The global corporate credit environment remains stable.

Despite higher credit costs and higher taxes, net income grew 36% over last year.

Turning now to slide number 12.

Slide number 12 shows our results in our global wealth management business.

Revenues were up 13% driven by strong customer activity.

Assets under fee-based management were up 13%.

Net interest margin increased over last year benefiting from the introduction of our bank deposit tiering program.

Expenses were up 2%, ex-FAS 123 expenses were up 10%.

Taxes were higher by $115 million reflecting the absence of prior year benefits.

Net income was up 56% or up 19% excluding the impact of FAS 123.

Slide 13 shows the results in our alternative investment business.

Revenue and net income declined by 17% and 13% respectively.

The decline reflects the absence of a gain on sale of the Travelers company's shares last year partially offset by higher private equity and client revenues.

Based on the realized gains in the fourth quarter of last year, we expect total gains to be lower than in recent history in this business for the remaining quarters of this year.

Lastly, as you can see, we have the charge in corporate and other related to our structural expense review.

So with that, let me wrap up with a few concluding comments.

First, I will summarize the quarter and then provide you with a sense of how we are thinking about the rest of the year.

First, the positives.

The key drivers of revenue remained very strong this quarter resulting in 15% revenue growth.

When adjusting for the items that I highlighted at the beginning of the call, revenue growth was still a strong 12%.

Expense growth was 17% and adjusting for the -- (technical difficulty) -- highlighted in the press release, it was 10%.

The relationship between revenue growth and expense growth improved substantially this quarter.

As our strategic expense review takes place, we expect the pace of year-over-year expense growth to continue to moderate through 2007 and our headcount growth is expected to slow from last year's 9% growth rate.

And now for the things that we are watching carefully.

On credit, as I said before, the challenging year-over-year comparison will continue next quarter as we had $210 million in net reserve releases in the second quarter of 2006.

In the third and the fourth quarters of this year, the year-over-year comparison should improve as there were no meaningful net new loans or releases in the second half of 2006.

Additionally, reserves will continue to reflect our best current estimation of inherent losses in our portfolio that are not yet visible.

As I mentioned, we will continually monitor the balance sheet to ensure we are allocating capital to the opportunities we believe are most likely to create shareholder value.

That includes the remarks that we had prepared for the quarter.

As I said, I look forward to meeting many of you in the coming weeks and Art, I think we are ready now to take questions.

Great, thanks, Gary.

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

Before we do, I might ask if everyone could limit their questions to one question and one follow-up, we would appreciate that.

So operator, over to you.

(OPERATOR INSTRUCTIONS).

Betsy Graseck.

Hi, it's Morgan Stanley.

Thank you.

I guess my biggest question is related to the balance sheet and if you could just talk a little bit, Gary, about how you see the balance sheet positioned relative to potential changes in the yield curve.

Well, we actually have had a bit of a reduction in our exposure to the yield curve as we have come through the quarter.

So the way we typically look at this is if we had a 100 basis point increase that happened instantaneously in the quarter and what would be the impact of that on our reported results.

If that happened in this particular quarter, the impact would be about $51 million than it was last quarter at this time.

So we are slightly less sensitive right now than we were three months ago.

More broadly related to the balance sheet is you think about the work that we are doing and the trend in our leverage ratios.

As you saw in our overall leverage ratio, we had some deterioration in the quarter.

We had mentioned this a little bit in the annual report that we had expected that would happen as we went through the year, but we tend to try and manage this above 4%.

In this quarter, we obviously invested some of the balance sheet in our trading activities and you saw very nice growth in our trading activities, so of the overall GAAP balance sheet increased more rapidly than our risk-based balance sheet and I think that will continue to be the case.

As we see opportunistically the chances for us to invest balance sheet in areas where we can drive good revenue and income growth without taking on risk that is overproportional, we will probably make those trade-offs.

Okay.

And do you see any, beyond that opportunities, to change the composition or the shape of the balance sheet at this stage with regard to either where your asset mix is or your funding mix is?

No, I really don't think so.

I mean I think we are pretty comfortable with the mix of funding that we have right now and there is nothing on the horizon that would change where we are.

Okay.

Thanks.

Glenn Schorr.

Thanks, it is UBS.

On slide 6, the U.S consumer mortgage trend, in the footnote, you noted that it excludes $5 billion of first mortgages and almost $4 billion of second mortgages where you didn't have FICO and LTV data.

Just curious on what type of loans that might be, why you don't have the data and how your gut is that that might change the results that you showed on the slide?

We actually just finished preparing this data over the course of the last week or so and we don't have a comprehensive view that includes all of the -- the full scope of the portfolio.

The underlying delinquency performance of the things that were excluded from the table have very good delinquency performance associated with them.

So there was no -- if you look at the underlying performance of those mortgages that were excluded from the table with those that are included, there was just no underlying difference in the delinquency performance between the two.

Got you.

I would guess it is probably stuff that falls into that all [pay] no [doc]/low doc type of --.

You know, we don't use that nomenclature here and don't think about the business in that way.

Okay.

But you don't have FICO and LTV scores on the loans?

Okay.

I'm good.

I don't need a follow-up.

Thanks.

Great.

Thanks.

Guy Moszkowski.

Merrill Lynch.

Good morning.

I also wanted to drill in on the credit issues a little bit.

First of all, the press release and also your comments focused a lot on what -- the way it is worded in the press release -- the change in estimate of loan losses inherent in the portfolio, which overall sounds a little bit more -- there's a little bit more emphasis on the subjective forward-looking expectation than what we have heard over the last couple of years in terms of the reserving process being highly formulaic.

Could you tell us a little bit about what thinking went into changing that sort of more subjective view of the future and how that impacted your decision to add to reserves?

Well, we always have some obviously some management discretion with regards to the credit reserves that we establish and in particular, we thought it was prudent.

As you think about the very early buckets of receivables portfolios that really haven't been around long enough to season to show any type of loss, it would make sense for us to try and anticipate what losses would be embedded in those portfolios when they mature.

The mortgage portfolio in particular is a portfolio that had grown rapidly over the course of the last year and we thought it was a sensible thing for us to reflect that rapid growth and to ensure that we had taken reserves against these early buckets before there was any sign of credit deterioration there.

So I think our general feeling about the portfolio is actually very good.

It is very nicely structured as you saw on the chart with the FICO scores and the LTVs and we feel very good about the process that we have gone through in this quarter to think through reserving in each of the buckets to ensure that we are trying to anticipate somewhat what we believe the credit conditions will be throughout the year.

And that is what you were seeing, Guy, reflected in the numbers.

And just if I could follow up also looking at page 6, the panel at the bottom that shows how the difference has opened up over the last year between the NCLs on the one hand, which have been quite consistent if you exclude the gray zone the last couple of quarters as you pointed out and the loan loss reserve, which has started to tick back up towards that sort of 147 level, but it is still, you know 20, 25 basis points below.

Should we extrapolate from this that you are going to try and close that gap back up so that the loan loss reserves and the NCLs are more or less at the same level as they were a year ago?

No, no.

Obviously we are very comfortable with the reserve level that we established in the first quarter of this year.

I think we are very thoughtful in thinking about the growth of the portfolio and the way we should reserve for these early buckets that I talked about.

If you look at the underlying numbers that are in the supplement itself and kind of trace through portfolio by portfolio and look at what the NCL trends look like, particularly given the bounce-back from the bankruptcy law from 2005, the performance has really been remarkably good.

So I think what you're seeing here is a reflection of what we believe is likely to be a somewhat more difficult credit environment in the last couple of quarters of this year, but certainly no issue that would cause us to think that the 122 doesn't properly reflect the full amount of the reserve that we need at this point in time.

Okay, thank you, Gary.

Mike Mayo.

Mike Mayo, Deutsche Bank.

Good morning.

Good morning, Mike.

Just point of clarification.

So none of the $2.1 billion of restructuring savings are in this quarter including the previously announced technology optimization effort?

Mike, this is Bob Druskin.

The previously announced technology stuff was in there.

The new things that we found this quarter, as well as everything incremental is not.

So how much is left say for this year?

Well, we said 2.1.

There was originally call it $400 million in the IT optimization, so it is about $1.7 billion.

Okay.

And I might have misinterpreted something, but Chuck Prince's opening comments, he mentioned he was positive about getting positive operating leverage not only in aggregate, but for each of the major businesses.

Did I hear that correctly?

And did he say that before?

I said that in December, Mike, at Citigroup Day.

I'm not including in that alternative investments because I don't think that is really a business that can be measured year over year, but I said in December that each of our businesses has a plan for this year and the Company in total has a plan for this year for positive operating leverage.

And so do you think this quarter is an inflection point with all these savings ahead for this year?

Well, I don't like to predict anymore, Mike.

People kind of throw my predictions in my face.

I know you wouldn't do that, but others do and so I think I would just like to stay away from predictions for right now.

All right.

Thank you.

John McDonald.

Yes, hi.

It's Banc of America securities.

Gary, I was wondering if you could give a little more color on the causes of the margin decline this quarter.

You cited the rising short rates and then also the trading impact and then excluding the trading impact, what might cause in the future a stabilization of the margin?

There is a large piece of this that is related to mix, Mike, so let me just talk this through a little bit.

As you know, the trading business is not really run to generate NIM in this way and so we do see some volatility from quarter to quarter.

A little bit more than half of this was related to the changes in the trading business.

For the rest of the business, although there was compression overall, obviously the growth in the mortgage business, that being a securitized business relative to other parts of the business portfolio, causes some margin compression even assuming that the yield curve had remained identical year over year.

And so that will have I think you know an impact on this as we go forward.

If you assume a static yield curve, which we have in our planning -- if you just assume a static yield curve and you assume a slight increase in the business mix that is tilted more towards securitized products, you are likely to see continued pressure to a certain degree on this measure and that is what is taking place in the quarter.

Okay.

And just on a related note, is Chuck's cautious optimism about the U.S.

consumer revenues, is that really driven by the volume outlook that you see or is there some expectation that that might be coupled with the margin getting better or maybe just a little color on what is driving the cautious optimism in the U.S.

consumer?

John, this is Chuck.

The reason I said that in December is if you look at that chart, which is page 9, you can see when I said it in December, we were really just exiting a very, very difficult period, which goes back a number of years in terms of organic growth.

We really did not have good organic growth.

Going back a long time in this business, it was all deal-driven and I said then and I say again now, I want to see this on a sustained period of time and it is obviously a mix of volume and margin improvement.

The yield curve is not helping us, so more of it is volume-driven now than it's margin expansion and happily the volume is helping us a fair amount in that regard.

But the cautious optimism is I want to see it on a more sustained basis than just a quarter or two.

So when we fill out the whole year and it looks like this then maybe I will feel a little less cautious and more optimistic.

Okay.

Just focusing on what the -- the optimism part I suppose or the cautious part, that is really driven by what you're seeing in some of the volume metrics?

It is that as well as the stable -- relative stabilization of the NIM deterioration.

You know compared to a year or two ago when it was on a huge stair-step down, it is at least in a stabilizing frame right now.

Okay.

Thanks.

Joseph Dickerson.

My company is Atlantic Equities.

Hi, Gary.

I have a question just on the share repurchase, where you've indicated that you won't be doing any more repurchases this year.

Is that mostly related to Nikko or is there stuff out there that we don't know about that you might act on?

No, it is -- (multiple speakers)

(multiple speakers)

Well, first of all, we have had a series of acquisitions that we have done, so the ABN Amro deal for example plays into the equation here as well and we contemplate that the Nikko deal obviously will be done here over the next quarter.

So as we think ahead about that and think of the other growth opportunities that we have, our best expectation -- I think the way I said it as I sit here today, our best expectation is that it is unlikely that we are going to be able to resume the repurchase program this year.

That said, I mentioned a couple of times that we are very cognizant of the opportunities that we have to continually monitor the balance sheet and identify opportunities to improve our capital usage and we are going to continue to do that and as soon as we can be back in the share repurchase business, I think it is fair to say we will be back in the share repurchase business.

(OPERATOR INSTRUCTIONS).

Meredith Whitney.

Hi.

This is Carla Krawiec at CIBC on behalf of Meredith.

We were just wondering if you could quantify the amount of the securitization gains in the quarter.

The incremental securitizations were minimal.

They were virtually none year over year in the quarter, Carla.

Okay.

Thank you.

David Hilder.

Bear Stearns.

First, I just wanted to understand the theory behind accruing compensation on the move to fair value accounting under SFAS 157.

I mean the positions presumably didn't change economically; you just changed the way they are accounted for.

So is that compensation that will actually be paid out?

What our thinking was, David, prior to the time of adopting this principle, we obviously paid compensation on the movement of the underlying derivatives that were now evaluated differently.

The change during the course of the quarter caused by the addition of our credit rating into the valuation of the derivatives resulted in a pick-up obviously in income.

We thought the right way to account for this was to accrue incentive comp against that.

We thought that was the proper way to do it.

As you know, the overall incentive comp that we will pay out on a full-year basis will be determined by the actual performance of that business over time.

So as this now moves over time, has more or less volatility as we go through future quarters, the incentive comp will go up or down and then finally when the full year's results are in, those determinations will be made.

So there is no lockstep tie-in necessarily between that and the outcome on incentive comp for the year.

Thanks.

And then a separate question I think for Chuck, if it is appropriate, about the purchase of Old Lane.

I am very familiar with what the team there achieved when they were at Morgan Stanley and they were obviously very successful in raising funds, but their track record in managing hedge funds is relatively brief and as I understand it last year when you sold the asset management business, part of the reason was that you didn't feel that you had management there to improve its performance.

Presumably you could have found a management team for somewhat less cost there than what it has been reported that you are paying for Old Lane.

So I guess I would like to understand what you are hoping to achieve there?

Well, David, a fair question.

In terms of Old Lane, we see that as much as an investment as an acquisition.

We are getting a great group of people, about 120 people will come over.

We end up with kind of a plug-in in terms of our whole approach to alternative investments as opposed to hiring a head of it who then has to go and restaff the whole organization.

While their performance is relatively young in the sense of how long they have been in business, I think it has certainly been perfectly acceptable.

So I feel very good about buying a team rather than an individual in that sense.

In terms of asset management, that was a completely different situation.

Most of our profits from that business came from our retail business and as you know, there has been a self-selection away from selling proprietary products in the industry generally.

So our institutional side of our asset management was pretty weak in hindsight and so that was what really led to the decision to fundamentally to exit that asset management business.

So in my mind at least, they are not analogous situations.

But coming back to Old Lane, I think getting the whole team in was really the distinguishing characteristic there.

Thanks very much.

Betsy Graseck.

Hi.

It's Morgan Stanley.

My last question is just on the target capital ratios that you have and it relates to the comment about ceasing the share buyback.

I just wanted to understand what kind of capital ratios you are looking to manage the balance sheet to?

Well, our [binding constraint] historically has been TCE and TCE we try to keep at the level of about 6.5.

I think we've talked about that historically.

You know obviously the overall leverage ratio is important to us as well and as I mentioned, we will keep that at four or better as we go through the year and hopefully make thoughtful decisions about the trade-offs that we make there.

So we are very focused on the balance sheet.

As I mentioned, share repurchases are important to us, but we have to manage the capital in the context of all of the things that are going on in the Company.

Well, since that is the same way that the Company has been operating in the past, are you signaling an expectation for a higher level of asset growth?

Well, we have had a pretty consistent level of asset growth now here over the last few quarters.

This quarter had a good asset growth.

I think you need to distinguish between asset growth overall and the growth in risk capital and what we have seen is faster GAAP asset growth than risk asset growth and that has allowed us to expand our fee-based businesses in ways that have been very attractive, having an excellent quarter this quarter and because those risk-based assets have grown more slowly.

No, I am not trying to signal any change in that strategy with what we are talking about today.

Okay.

And the buyback is on a net basis that you're talking about or on a total basis?

On a total basis.

Got it.

Okay, thanks.

Operator, are there any further questions?

Yes, sir.

No, sir.

There are no further questions.

Okay.

Well, thank you very much.

Thank you all for joining us today and of course, please give us a call at Investor Relations for any questions that you have during the course of the day or over the next couple of weeks.

Thanks and this concludes our call.