花旗銀行 (C) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to Citi's first quarter 2009 earnings review, featuring Citi Chief Financial Officer, Ned Kelly.

Today's call will be hosted by Scott Freidenrich, Head 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.

Also as a reminder this conference is being recorded today.

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

Mr.

Freidenrich, you may begin.

Thank you, Operator, and thank you all for joining us.

Good morning and welcome to our first quarter 2009 earnings review.

On our call this morning, Citi's Chief Financial Officer, Ned Kelly will take you through the earnings presentation which is available for download on our website citigroup.com.

Afterward we'll be happy to take questions.

Please limit follow-up questions to one.

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

Citi's financial results may differ materially from those statements so please refer to our SEC filings for descriptions of the factors that would cause our actual results to differ from expectations.

With that said let me turn it over to Ned.

Thank you, Scott.

Good morning, everyone.

I wanted to start if I could by thanking Gary Crittenden for the tremendous contributions he's made to Citi during his time as CFO and I'm sure will continue to make in his new role.

His work in reengineering, centralizing treasury functions, and streamlining the finance organization are but a few examples of the contribution he's made, to say nothing of navigating the firm through very difficult times.

He's been gracious enough to agree to help me through the transition and perhaps most importantly, he's left behind a finance team which is terrific, and has been enormously patient with me and also extraordinarily helpful.

Turning to the quarter, this is the strongest quarter we've had in well over a year on many measures, perhaps most vividly reflected in positive net income.

Overall revenues were strong, driven by the performance in Institutional Clients Group, which offset declines in other areas; expenses and headcount continued to trend downward.

Together the higher revenues and lower expenses generated a strong operating margin.

Assets also continued their decline and we continued to reduce exposure to the riskiest assets.

Net revenue marks declined substantially during the quarter.

With all that said, we still face challenges at general market conditions remain uncertain and credit conditions and consumer continue to deteriorate.

Please turn to slide one to begin the earnings discussion.

Slide one shows our consolidated results for the quarter.

We reported revenues of $24.8 billion; that's nearly double year-over-year and $19.2 billion higher sequentially.

Our reported expenses were down 23% year-over-year; when adjusted for the effect of certain charges in items that we disclosed in the press release, expenses were down 19% year-over-year and 4% sequentially.

Credit costs were up by $4.4 billion over last year, primarily due to higher net credit losses of $3.6 billion and a $754 million incremental net charge to increased loan loss reserves.

Sequentially, credit costs were down $2.4 billion due to loan loss reserve builds that were lower by $3.3 billion, offset partially by a $1.1 billion increase in net credit losses.

These factors drove net income of $1.6 billion for the quarter.

Slide two shows the earnings per share calculation for the quarter, which included one unusual item -- EPS was negative $0.18.

EPS was affected by preferred dividends of $1.3 billion, as we confirmed in a separate press release this morning.

We intend to continue to pay dividends on outstanding preferred shares until the closing of the previously announced exchange offers.

Additionally, EPS includes a one-time, $1.3 billion reduction related to the impact of a conversion price reset on $12.5 billion of convertible preferred securities we issued in the first quarter of last year.

That reset has no impact on net income, equity or the capital ratios but it did result in a reclassification from retained earnings to additional paid in capital on the balance sheet to reflect the benefit to preferred shareholders.

Excluding the impact of the one-time reset, income available to common shareholders would have been positive on both a basic and fully diluted basis.

Slide three shows the sequential revenue trend over the last nine quarters, adjusted for net revenue marks in the securities and banking business.

On a reported basis as I said revenues for the quarter of $24.8 billion were in line with the record quarters of early 2007 when the balance sheet was larger by about a $0.5 trillion.

As shown in the dotted lines on the page, total disclosed net marks for the quarter were $2.2 billion.

There are three items we added to our traditionally disclosed marks this quarter, which amounted to $4.2 billion and which are detailed in the appendix on slide 26.

These additional items were -- these additional items started with, on the mark side, $1.2 billion in private equity losses, and then these items were offset partially by $2.7 billion net benefit from CVA on our non-monoline derivative positions, and a $541 million benefit in revenue accretion on non-credit marks and certain security and banking assets that we've moved from mark-to-market to accrual accounts last quarter.

All the historical numbers in the slide are adjusted to reflect these items and excluding these net marks, revenues for the quarter were $26.9 billion.

Slide four shows revenues in each of our major businesses.

Within ICG, revenues and securities and banking were $7.2 billion, up $14.5 billion versus last year driven by a number of factors.

Disclosed net marks at $2.2 billion were nearly $11 billion lower than last year and $13 billion lower than last quarter, most of which are included in the fixed income markets business.

The S&B revenue results reflect an unusually favorable trading environment driven by customer flows and market volatility.

Clients remained actively engaged with us through the quarter.

Our equity and fixed income markets businesses together generated $6.6 billion in revenues, and fixed income, interest rates, currencies and credit products were particularly strong and equity markets, equity derivatives and trading were the key drivers of revenue.

Trading assets on the balance sheet declined by $243 billion from the prior year period.

These businesses as we've discussed in the past have been significantly derisked and delevered but are still generating substantial revenues.

In investment banking we generated $1.2 billion in net revenues primarily from debt underwriting; in equity underwriting, after two quarters of consecutive declines, we saw a rebound in the quarter.

And finally advisory revenues of $230 million were in line with last quarter.

In consumer banking revenues fell 18% versus last year to $6.4 billion and increased 5% sequentially.

In the US key drivers in the year-over-year decline were lower loan volumes and spread compression due largely to higher non-accrual loans and lower interest rates on loan modifications.

The sequential increase in the US was driven by higher gains on sale, on higher origination volumes and improving spreads.

Outside the US, foreign exchange and lower investment sales due to weaker equity market conditions drove the decline.

In global cards, revenues fell 10% versus last year to $5.8 billion, driven primarily by higher credit losses flowing through the securitization trust but also due to the impact of FX.

Managed revenues increased 3%.

Global card revenues were up 25% sequentially driven by a $1.1 billion gain on the sale of Ready Card shares in the current quarter.

I'd note that last year's first quarter also included an aggregate gain of $1.1 billion from the sales of Ready Card and Visa shares at the time.

Wealth management revenues declined both sequentially and year-over-year to $2.6 billion affected by declining asset valuations across all regions, lower capital markets driven revenues, lower management fees and broker attrition.

Transaction services revenues were $2.3 billion and was down 1% from last year, although it was up 8% including the effect -- excluding the effect of foreign exchange.

Treasury and trade solutions had another strong quarter, though we expect economic conditions could slow the rate of growth in the shorter term.

Security services continues to operate in a difficult environment as asset value declines pressured fee based revenue and interest revenues fell with declining liability balances.

That said, transaction services had record net income in the quarter.

In summary, the businesses demonstrated revenue generation capability in the midst of difficult conditions.

Slide five is a chart similar to one that we showed last quarter which shows the movement in corporate credit spreads since the end of 2007.

During the quarter, our bond spreads widened and we recorded $180 million net gain on the value of our own debt for which we've elected the fair value option.

On our non-monoline derivative positions, counterparty CDS spreads actually narrowed slightly which created a small gain on our derivative asset positions.

Our own CDS spreads widened significantly which created a substantial gain on our derivative liability positions.

This resulted in a $2.7 billion net mark-to-market gain.

We've shown on the slide the five-year bond spreads for illustrative purposes.

CVA on our own fair value debt is calculated by weighting the spread movements of the various bond tenors corresponding to the average tenors of debt maturities in our debt portfolio.

The debt portfolio for which we've elected the fair value option is more heavily weighted towards shorter tenors.

Slide six, which I'd referred to in the introduction, shows a reduction of key risk assets in the securities and banking business over a six-quarter period.

For each quarter you can see the split between assets held in fair value accounts and those held in accrual accounts.

We've reduced our total key risk exposure since the fourth quarter of 2007 and this quarter they are well below half the level they were in the fourth quarter of 2007.

We also, as you know, moved a substantial portion of the fair value assets into accrual accounts during the fourth quarter 2008, as we believe the pricing levels at the time made them attractive opportunities.

While this accounting change doesn't reduce the risks associated with the portfolios, it has reduced the earnings volatility associated with them.

Moreover, during the quarter, we recorded a $541 million benefit related to the revenue accretion on the non-credit marks on these assets.

Slide seven shows a substantial asset reductions in seven of the categories that comprise the majority of the marks each quarter.

We showed you this slide last quarter and are including it again to illustrate the continued decline in key risk categories.

As at the end of March, 71% of these assets were accounted for on an accrual basis versus 15% last year.

Slide eight shows the trend of our expenses.

Expenses were $12.1 billion and fell 23% versus last year.

This quarter's expenses were down by $4 billion from our peak expense level of $16.1 billion in the fourth quarter of 2007.

In the prior year period, and in the current quarter, there were several items that affected expenses that we detail in today's press release.

Taken together, they accounted for $626 million of charges in the first quarter of 2008 and $253 million benefit this quarter.

Adjusting for these items, expenses would have declined 19%.

If you exclude the impact of FX, expenses would have declined 18% since last year's first quarter.

Excluding last quarter's $9.6 billion goodwill impairment charge and a number of press release-disclosed items, expenses would have declined 4% sequentially.

We're pleased with the progress in our expense reductions and remain on track to achieve our expense target of approximately $50 billion to $52 billion for the full year.

Our goal is to achieve the lower end of that aspiration.

Slide nine highlights the progress we continue to make in reducing headcount, marked with the 17th consecutive month in which headcount has come down.

We were down approximately 13,000 or 4% from last quarter, and down 65,000 or 17% from the peak at the end of 2007.

This reflects a mix of risks, divestitures and attrition partially offset by hires we also made during the quarter.

We have said that we expect to reach our target headcount of 300,000 by mid year and we're well on our way to achieving that goal.

Slide 10 shows the trend of our consumer credit costs over the last nine quarters on top and the reduction in consumer loans along with key credit ratios at the bottom.

As the top graph shows, both net credit losses and reserve builds have increased substantially since early 2007.

The total allowance for credit losses in our consumer portfolio stands at $24.3 billion.

You can see from the line in the top graph that we've held months of coverage in our consumer businesses fairly consistent between 12 and 13 months.

That reflects our current outlook for losses embedded in the portfolio.

Reserve levels in the consumer business have increased substantially.

In global cards, we built $1.1 billion in reserves during the quarter versus $1.3 billion last quarter.

That build was in line with the sequential increase in NCLs on an annualized basis.

A number of inputs are considered determined appropriate reserve levels in any quarter.

One example is 30-day delinquencies which tend to be an early indicator of potential losses.

In North America cards, we saw a moderation in the rate of increase of loans 30 days past due relative to last quarter.

That said, this is a single metric and one quarter's results are not conclusive.

Similarly in North America consumer banking, where we added nearly $1 billion of reserves in the quarter, we also saw a moderation in the growth of loans 30 days past due.

The sequential increase in net credit losses was also much smaller than the sequential increase last quarter.

This is partly due to some seasonality, which was reflected both in net credit losses and in reserve bills.

The graph on the bottom of the page shows that the consumer NCL ratio has been consistently rising since early 2007, particularly over the past year.

While that's largely due to higher credit cost, the ratios themselves are exacerbated by lower loan levels as shown in the blue bars at the bottom.

As a percentage of total loans, reserves have increased from 2.4% at the end of first quarter 2008 to 5% this quarter, reflecting both continued reserve building and lower loan levels.

Slide 11 is a variation on the slide we've shown for several quarters, charts the net credit loss ratios in our North American cards and first mortgage portfolios as well as the unemployment rate during the current recession.

You can see from the 10.18% cards NCL rate that losses seem to be breaking historic correlation with unemployment.

Combination of high unemployment and unprecedented clients and home values seems to be driving cards with net credit losses to new highs.

Here also a continued decline in loans due to fewer balance acquisitions, lower sales volumes and risk mitigation efforts is having an adverse denominator effect on the NCL ratio.

Average managed loans in North America are down by $7 billion or 4% versus last year.

As we said in the past we expect that NCLs will increase with the unemployment rate which so far shows no signs of moderating.

Looking at the yellow box at the top of the page, the NCL ratio and yields are much higher in retail partner cards than in Citi branded cards, that's consistent with past quarters.

We note that the retail partner portfolio will be part of the Citi holding segment where the business will be managed to optimize its value.

Turning to the first mortgage net credit loss ratio there's a denominator effect on the ratio similar to the effect in cards.

Here average loans are down by $19 billion or 12% versus last year.

Still, even after normalizing for loan balances, the ratio continues to increase.

Slide 12 shows our corporate loan loss reserve ratio at the top and it shows historical corporate reserve builds at the bottom.

Investment grade and non-investment grade defaults have continued to trend upwards, the vast majority of our corporate lending exposures in the form of investment grade loans.

We continue to build general reserves which are shown on the blue box and that reflects an overall weakening in the corporate credit environment.

Looking at a sequential quarter comparison, our incremental net loan loss reserve build fell $2.1 billion driven by two factors -- first, as you know, last quarter's specific build included $1.2 billion for LyondellBasell; this quarter our net credit losses included $1.4 billion of losses related to specific counterparties, primarily Lyondell, for which we had previously established FAS 114 reserves.

The specific reserves established for those exposures were released this quarter, and this release was netted against a gross build of $1.7 billion, which yields the net build, which is shown on the chart.

Our current loan loss reserve balance for funded corporate loans is about $7.4 billion or 4.4% of total loans.

Slide 13 shows the Tier 1 capital ratio on the left side and tangible common equity on the right.

And the Tier 1 capital ratio at the end of the quarter was approximately 11.8%, which was down slightly from last quarter.

That slight decline in the Tier 1 ratio was due to the consolidation of credit card related securitization assets for regulatory capital purposes.

Risk weighted assets increased approximately $82 billion due to the consolidation which caused a reduction in the Tier 1 ratio of about 100 basis points.

This deterioration was almost completely offset by higher Tier 1 capital and a reduction in other risk weighted assets reflecting the overall reduction in the balance sheet.

Looking ahead, Tier 1 will benefit from an expected gain from the Smith Barney transaction which may close in the second quarter; we believe at the latest, the third.

We finished the quarter with tangible common equity of $29.7 billion which is flat from last quarter, and then looking at the factors we've already announced that could potentially benefit tangible equity, first there's a Smith Barney transaction which I'd mentioned that has a benefit of about $6.5 billion.

Second, we expect up to approximately $51 billion from the exchange offer depending on the participation rate.

As we've announced this morning and as I will discuss further in a minute, the offer will not launch until after the completion of the stress test.

Third, we're expecting $7.5 billion from the conversion of the ADIA mandatory convert.

The first tranche in the amount of $1.9 billion is scheduled for conversion in March of 2010 and then converts throughout 2010 and 2011 March/September, March/September.

The deferred tax asset at quarter end was essentially unchanged at approximately $43 billion.

That was down about $1 billion from the year-end level.

We did not record a valuation allowance in the quarter.

Slide 14 shows the split between our US and international deposits.

As the red line on the top of the page shows, if you exclude the impact of foreign exchange, total deposits were essentially flat on a sequential basis.

The blue bar shows deposits in the US, which were up $8 billion on a link quarter basis.

The gray bars show international deposits, which declined $19 billion sequentially; more than half of that decline was due to FX adjustments.

Internationally, slight growth in retail deposits is offset by a decline in GTS deposits particularly in EMEA on an FX to adjusted basis.

To wrap up, on slide 15, we've clearly made substantial progress on many fronts.

We've completed 24 divestitures since the end of 2007.

That's allowed us to focus on the core business and to generate capital benefits.

We've worked to delever the Company and derisk the balance sheet.

From the third quarter of 2007 to March 2009, assets have fallen by more than $0.5 trillion.

In our securities and banking business, key risk assets have fallen by more than 50% since the end of 2007.

Expenses and headcount have continued to decline.

As you know, last quarter we announced a reorganization into two operating units, Citi Corp and Citi Holdings.

That new construct will allow us to focus on the core business activities in Citi Corp while allowing us to manage, optimize, and run off certain segments of Citi Holdings.

We'll begin reporting under that new structure in the second quarter and we'll make sure you have historical financials in advance of the second quarter earnings.

While we've made progress, the environment continues to be challenging, so I thought I might give you a few thoughts on the remainder of the year.

First, on revenues, reported revenues of nearly $25 billion were strong; they reflect the revenue generation capability of the franchise.

Revenues for the remainder of the year goes without saying we'll continue to be dependent on general economic and market conditions.

While continued volatility in the markets could create an environment that's conducive to trading gains, it's obviously highly unpredictable.

Additionally, there's a seasonal element to the ICG business where the first quarter has historically been the strongest in the year.

Revenue growth outside ICG could be affected by lower asset levels if we manage down our balance sheet to reduce risk positions.

In the current environment we believe this is a prudent strategy and one that will benefit us if the credit environment in particular continues to deteriorate.

On the other side, helping revenues in 2009 will be a number of factors.

First, the impact of the repricing of the credit card portfolio; we began to see the benefit of these actions in the first quarter.

We've done a thorough analysis of the portfolio and have made pricing adjustments, which are expected to mitigate credit costs in the business.

Second, as I've noted, we've moved certain of our assets to accrual accounts as we believe that current levels of pricing make them attractive opportunities.

We expect to see continued revenue accretion on the non-credit marks on these assets over time.

Offsetting these positive factors could be continuing marked uncertain exposures which, as you know, while substantially reduced, still exist.

Moving on to expenses.

We said in the fourth quarter that we were targeting a full year 2009 expense base of between $50 billion and $52 billion.

As I said earlier, these quarters' results demonstrate that we've made substantial progress and we hope to bring it in at the lower end of that range.

Credit costs are clearly going to remain a headwind during 2009.

I think that's been a pretty consistent theme.

This quarter, the net credit losses for our consumer businesses actually came in approximately $1 billion better than we had previously indicated during the third quarter of '08, I believe.

This was primarily due to foreign exchange adjustments and better than expected losses across many of the products.

There was no concentration; essentially, it was spread across the products.

Looking to the second quarter, we expect an increase in line with what we previously indicated last year.

In other words, we expect total consumer NCLs in the second quarter of 2009 to be in the range of $1 billion higher than this quarter.

That would bring it into line with what we discussed in the latter part of last year in terms of what it was that we expected.

There are two key factors that are driving that expectation.

First, the rate at which customers became delinquent in our North American real estate business rose steadily in the second half of 2008 and it peaked in November of 2008.

Since then, this rate has steadily declined, but that late 2000 peak and early bucket delinquencies is expected to result in higher net credit losses next quarter versus this quarter.

Second, in some of the international consumer portfolios we continue to see rising delinquencies if general economic conditions continue to weaken globally.

Our consumer loan loss reserves -- on consumer loan loss reserves, we will continue -- we expect to continue to add to our reserves until the end of 2009 and should see the end of significant additions by then.

Corporate credit as you know is inherently difficult to predict.

It would be reasonable to assume as corporate default rates increase we'll continue to add to reserves and likely will see higher net credit losses, although both the recognition of those credit losses and the building of reserves will be somewhat episodic.

To sum up, we're pleased with this quarter's performance.

We certainly remain focused on the risks that continue to face the Company.

Before opening it up to Q&A I'd like to make two more comments.

First, as many of you may have seen, we announced this morning that we're continuing to work on finalizing the exchange offer.

But because of the proximity of the government stress test results announcements, we're not going to launch the exchange offer until the conclusion of the test.

We've continued to work with both the SEC in completing the customary review process and with the government in finalizing documents for the government exchange.

When we first filed, we realized we had to complete the SEC process, execute definitive documents with the Treasury and get regulatory approvals.

While all of these have proceeded without any substantive issues, it's not a huge surprise that it's taken longer than we might have expected.

When you add that extension of time to the fact that the results of the stress test are expected in the near term, this led us to the natural conclusion that it made sense to delay the launch of the exchange offer until we could tell the market exactly what the results of the stress test are.

That is going to be a source of considerable interest irrespective of the outcome and we thought the prudent thing to do under the circumstances was simply to delay.

Just as a footnote to that, I can't and we cannot currently envision circumstances under which we would change either the implied $3.25 conversion price or the announced tender prices for the preferred stock being sought, but I wanted to add that to the press release that we had issued this morning, given the market's interest in the exchange offer.

Second, as many of you are aware, we're making some changes in our Investor Relations area.

Scott Freidenrich has been running our IR group and is moving over to new responsibilities at Citi and I'd like to thank him as I know all of us would for his work in IR.

I'm happy to announce that John Andrews, known to many of you, has joined Citi as the new Head of IR.

I've worked with John over the last couple weeks and he and I look forward to working with all of you.

I'd be happy to open it up to Q&A.

As you might imagine I've gone through an immersion experience over the past few weeks.

I'll be the first to tell you if I don't know but I will do my level best to answer whatever questions you have, and I am ably assisted by a number of people around the table who will make up, I'm sure, for whatever deficits I might suffer.

With that, I'd be happy to answer any questions.

(Operator Instructions) Your first question comes from the line of Guy Moszkowski with Banc of America Securities/Merrill Lynch.

First question I have for you is I know you went through the discussion of 30 day delinquencies and how that helped you decide what your loss provisions would be, but all we see is the 90 day numbers.

And I guess the question is how do you reconcile the fact that the reserve build portion of the consumer loss provision declined by about half from the fourth quarter, when your 90 day delinquencies in the US rose by about 90 basis points and globally by something like 80?

Well, Guy, as you might imagine, I spent a fair amount of time during the past couple weeks talking about that and we've talked about it a fair amount internally.

The things that I've focused on are threefold in that discussion.

One is, as you know, we have a 24 billion rough numbers allowance in the consumer side.

Second piece of it is that we've maintained more or less the consistent months of coverage ratio with respect to those consumer loans.

As you know it's been between 12 and 13.

And then if you look at the sequential quarter increase, which I think is rough numbers $500 million on the consumer side from 5.2 to 5.7, the reserve build is, I think, rough numbers $2.4 billion if I'm not mistaken, something in that neighborhood which as you know is more than 4 times that sequential increase.

I think if you look back at the fourth quarter and this is related to some of the comments I made, I think towards the latter part of last year we were expecting actually a higher credit loss in the first and second quarter of this year which may have informed the reserve build in the fourth quarter.

We've actually now looked at it and as I mentioned with respect to the first quarter, it had come in about $1 billion less than where we thought we would be, so when you take all those factors together, we implemented the reserve build that we did.

As I mentioned, we have not ruled out the possibility and in fact expect that it may go back up next quarter but my own view is, given the months of coverage and given the level of the allowance overall, I think we believe that we are still very well positioned.

Thanks for that.

My follow-up question is on commercial real estate finance.

Could you speak to what your mark-to-market or commercial real estate finance and credit reserving was during the quarter in securities and banking and anywhere else in the firm where there might be exposure?

And also tell us how much commercial real estate exposure did you move into accrual accounting in the fourth quarter?

In the fourth quarter there would have been very little that was -- in the fourth quarter.

(multiple speakers)

Okay I guess the question then more broadly is how much CRE finance did you move into held to maturity or into accrual accounting last year?

I'd have to check.

As you know on slide seven, basically in the SNB risk categories we've got CRE there; as you know at 3/31/09, the risk exposure was $36 billion versus the year earlier and then obviously at fair value accounting, we're down to $5.7 billion.

I don't have the specific break out in terms of what it is that we moved actually; somebody fortunately has just handed it to me.

The trading account from fourth quarter to first quarter actually went down $100 million.

Held to maturity actually went down interestingly enough 26.9 billion to 25.8 billion, 1.1 billion, and the equity method essentially was just a minor change of 100 million.

On the other piece of it, my recollection is that the marks or the reserves that we took against the commercial portfolio downtown this quarter were relatively minor.

And as you know, a bunch of our commercial real estate is actually embedded in consumer and in fact on page 26 of the appendix, you can see that we've got the writedowns on CRE which confirms my recollection of about 186 million.

Okay that's great.

Thanks very much for the help.

Sure.

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

I just want to clarify a couple things that you mentioned that, did I hear you right, the consumer NCL should be about $1 billion higher next quarter versus this quarter due to the early stage delinquencies that peaked in November '08?

That's right.

Betsy, going back to it is I think and obviously I was not here but I am told in the third quarter of '08 I believe, we suggested -- or in the fourth quarter rather, we suggested that we expected net credit losses in the consumer side to be $2 billion higher in each of the first and second quarter than they had been in the third quarter.

And at this stage, as you know, we were actually $1 billion short of that in the first quarter.

What we were doing is essentially reverting to the discussion that we had at the end of last year, getting back to a number that's $2 billion higher than it was in the third quarter.

The rate of delinquencies since November, as you know, has in fact gone down.

It peaked in November and as it works its way through the buckets, we expect obviously, if you will, the elephant will make its way through the python at that stage but it hasn't.

As I said, the rates of delinquency have declined since then but we're anticipating that November peak to play its way through in the second quarter.

Just a broader question on card in general.

Obviously major card player, unemployment jobless claims continue to stress portfolios here and we have not only the UDAP that's expected to go into place July 2010 but the possibility that it gets put into place sooner, given actions that Congress is taking.

Can you help us understand how you're managing your portfolio domestically as well as internationally with regard to outstandings and how you balance the profitability question versus the size question?

The short answer is we're managing very carefully as you might imagine, with due regard obviously to the environment that you've described and the fact that we have experienced substantial losses in that portfolio.

I think it's fair to say that the bias has shifted, if you will, from growth to risk management and that's reflected in a variety of things in terms of our risk mitigation efforts, looking at lines very carefully, where we've taken some actions recently to try to reduce those lines, and we are clearly trying to work through to reduce the losses to the extent that we can.

Frankly, there's little to choose between the US and internationally in the cards business.

The trends are broadly similar.

You see that in terms of consumers drawing back in declines in sales, which ultimately leads, as you know, to a decline in balances.

The net credit losses by and large are pretty similar.

I think we have a chart in the appendix that reflects that.

The US business, as you know, has got the securitized cards in it, which is reflected, as you know, in the delinquency ratios in the retail partner side which are higher than they are in the branded cards.

So it's a tough environment.

I think we don't expect that there's going to be any market pickup in the near term and that growth opportunities by way of acquisitions or balance transfers or whatever it might be should be limited by prudence, so we're trying to risk manage our way through the cycle, mitigate the losses and make sure that we're well positioned to participate in a recovery; but as I said, my suspicion is that there is a shift in bias.

It is from one of historical growth now to trying to manage the portfolio as prudently as we can.

Okay.

Then just one very small nit question on page 13 where you indicate the TCE improvement coming from the various actions you're taking, including the preferred exchanges that you're anticipating.

Yes.

You've got TCE as $51.2 billion in the chart but in the footnote, it's $52.4 billion.

I'm just trying to understand why there's a difference in those two numbers and are you suggesting a different price?

I think we would be the first to concede that that is probably -- there is apparently some discount built into that number but the fact is that it is around -- it is --

When you say discount built into that number, you're talking about an exchange ratio?

I'm seeking advice.

Excuse me?

I said I'm seeking advice.

Oh, okay.

There's a discount to face value apparently.

Now I'm not sure that I fully understand that, the number is around $52 billion but we can circle back to you on that.

Okay.

And you indicated that at this stage you really don't anticipate any exchanges in the exchange ratio?

That's right.

Either in the exchange ratio or frankly in the stock price.

Okay, thanks.

Your next question comes from the line of Mike Mayo with CLSA.

Good morning.

Just a general question.

This is the first conference call since you've been CFO.

Just kind of style changes now that you're CFO and also curious this is the first conference call that Vikram Pandit -- first earnings call that Vikram Pandit has not been on.

Is this a stylistic change?

Should we read into that anything?

With respect to the latter, Mike, I don't think so, as in fact, I am advised that this isn't the first conference call where he hasn't been present; but having said that, no, I don't think you should read anything into that at all.

On the second point, I will let you be the judge of whether there are any style changes.

I can tell you that I have immense regard for Gary.

He's become a very good friend in addition to being a very highly valued colleague.

I'm very sensitive to the fact that I have big shoes to fill and doing my best.

I will appreciate your patience as we go through this process and I'm working as hard as I can to bring myself up to speed.

To be a little more concrete, I'm looking at just the big picture measure, reserves to non-performing asset, which that ratio is down a lot in the last year.

And when you were at Mercantile, you were a lot more conservative with reserves to NPAs, and so to the extent that you're cautious on the outlook for credit quality, you said you might be increasing the level of the reserve build next quarter.

What's a reasonable level to shoot for in terms of reserves to NPAs?

I think, two things.

One is that obviously one of the things that I've gone through, as you point out, in the transition from my former life to the current one with, as you know, an intermediate stop is to understand the reserving policies which is, you know, are different in the context of a firm of this nature with the consumer exposures that it has, and obviously with the large investment [grade] corporate exposures it has.

There are a couple of differences from what I'm accustomed to.

The team has been great in terms of taking me through those but as I said earlier, when you look at the absolute allowance level relative to consumer, I think it's fair to say that $24 billion, my view is -- and it's obviously one shared by the team and the firm -- is actually in pretty good shape.

Secondly, we focus on those coverage ratios as you know in terms of months of coverage and they have remained fairly constant.

To one of the points that I made earlier in terms of what it was that we were thinking about during the fourth quarter of last year, you could argue that we were conservative in our reserving against the consumer portfolio at that stage, given our expectations.

As I said, it came in a little lighter than we thought but we're not getting overly optimistic and suspect it may track back up in the second quarter.

In addition when you look at the corporate loan portfolio, I think our reserve in there is about 4.4% if I recall, which strikes me as pretty solid.

The fact is that that's going to be, given the nature of the portfolio, lumpy and episodic, less predictable; but having said that, I think we feel in pretty good shape on that front.

The thing that we're bracing ourselves for, as I think everybody is, is what is in fact going to happen to the economy and what's going to happen to the consumer.

We're tracking that very closely.

We'll do what it is that we think makes sense in the reserving front as those losses flow through, but I think we have maintained a consistent methodology consistently applied and that is how we will continue to pursue it.

And then last short follow-up.

How much more should we expect the reserve build to be next quarter relative to this quarter?

Do you have any sense yet?

No.

Because obviously that's going to be highly contingent on whether we're right.

We've been wrong obviously, as we were in the fourth quarter in terms of predicting what the first and second would look like.

I'm sure that I run the hazard of being wrong with respect to the second quarter.

That was just our effort to give you some sense of where we thought it would be but ultimately the reserve level would be determined by results during the course of the quarter.

So in your role you'll take a new independent fresh look at that I guess?

With able assistance.

Okay, thank you.

Your next question comes from the line of Meredith Whitney with Meredith Whitney Advisory Group.

Hi, good morning.

I have a few unrelated questions.

I just want to first start off with a clarification which is -- the trends in the mortgage portfolio, how much of those were influenced by the foreclosure furlough during the quarter?

Very little.

As a matter of fact, if you look at the 90 days plus past due bucket, there is almost, there is an immaterial percentage of that bucket that is reflected by the forbearance.

Okay, and then can you -- forgive me if you said this previously, explained previously -- what happened in securities and banking in Europe during the quarter to have such outsized results?

I think my suspicion is and somebody will quickly correct me if I'm wrong, I think the marks by and large are basically booked in New York.

And if the European results reflect the fact that the marks are booked in New York, so the relative outperformance of Europe on one level given that in terms of that $4.2 billion of traditionally disclosed marks is what drives that.

I'm sorry, could you dumb that down for me please?

Yes.

In other words, if you think about it, we have $4.2 billion of what we described as traditionally disclosed marks.

As you know, those are by and large in securities and banking.

Those marks would predominantly be booked in New York rather than Europe.

Right, but on a relative basis, Europe was stronger and that's what I'm asking about.

Not US -- I'm sorry, Europe relative to US; but Europe relative to Europe?

I'm sorry, could you bear with me one second?

Sure.

I'm now told that -- I'm sorry, bear with me one second.

First quarter '08, I am told Europe did have the marks.

This year, they do not.

And on the sequential basis the difference?

They didn't have the marks last quarter?

They did not have the marks last quarter.

First quarter (multiple speakers) --

They had the marks last quarter; they don't have the marks this quarter?

First quarter '08, Europe had the marks.

I'm looking at (multiple speakers) --

Not since then.

So I was right.

Right, but in terms of (multiple speakers) -- on a sequential basis.

(multiple speakers) That's an historical issue.

(multiple speakers)

Sequential basis -- apples-to-apples, no marks.

Okay, so they're just -- it's materially stronger and I'm just wondering what's in there, if it's not marks, what is it?

I think it's pretty broad based.

In other words, if you look at the revenue distribution across securities and banking, fixed income was strong; equities were strong; investment banking was relatively strong, obviously down from historical levels; rates and currencies, as you know, was particularly strong within the fixed income business, and I suspect that in part reflects that.

So I think, as I said, fixed income was the largest part of the revenues.

I don't want to understate the performance of equities or investment banking but I think it's attributable to fixed income performance.

Okay and then my last question is a strategic question.

On Citi Holdings, can you review your run-off versus disposition strategy within that portfolio?

And then maybe talk about some of the things that are going on, not name specific, but some of the conversations you're having of deal volumes picking up, interested in those assets are picking up, please?

Well, as you know, Meredith, when we announced it in January -- and unfortunately I was involved in that -- when we announced it in January, essentially we just replaced the assets in Citi Holdings into three broad buckets.

As you know, one was brokerage and asset management, the second was essentially the consumer business which, as you know, as I mentioned earlier includes the retail partners card portfolio, and the third was what we described as special assets.

When we announced that, we said that basically we'll have three strategies in connection with those assets.

One, and the over arching one was to optimize value with respect to them.

The second was to manage those assets that we could not optimize in the near term, as effectively as we could across the cycle in order to mitigate risk and maximize returns; and the third is in the special asset portfolio, those are obviously assets and wind down.

I think it's safe to say that none of that has changed.

As you know as part of that, we went into the Morgan Stanley Smith Barney joint venture which I think we've said is typical, or a prototype for the types of deals we would like to do in terms of up front cash payment, capital generation, retention of the upside for the future when the markets might improve.

That's not going to be easy to replicate but we're thinking about that concept in connection with a number of businesses on the holdings side.

We're going to continue to pursue that.

I think it's also fair to say that if opportunities emerge, that allow us to return capital to the firm as a whole, on a basis where it makes sense and where we believe that can be redeployed better than the way it's deployed today, we will in fact pursue those.

And I'm sure it wouldn't come as any surprise to you that we continue to actively consider what our alternatives might be in the context of achieving that optimization of value that we laid out in January.

Okay, and what bucket would the private label card business be?

I'm sorry, I just couldn't quite hear you.

I said what bucket would the (multiple speakers) --?

It's in the consumer portfolio.

No, no, in terms of -- I know that.

In terms of optimized special assets or managed.

That is basically in managed.

Okay.

All right, thank you.

Sure.

Your next question comes from the line of John McDonald with Sanford Bernstein.

You had a pretty big chunk of assets in the Fall that you moved out of training and into held for sale and/or held to maturity.

Can you comment on how the cash flows in those assets are tracking relative to the levels they are marked at?

And over time, would you expect to accrete net interest income from those assets?

Yes, John, as I think I had mentioned earlier, one of the adjustments that we made to revenues was the $541 million worth of accretion associated with the assets that we had transferred from mark-to-market to held to maturity.

As I think I mentioned, obviously recognizing that life is uncertain, we expect that accretion to continue, because we believe when we moved those assets, they were marked at attractive prices and that value should accrete over time.

As I said it was a $541 million benefit in the first quarter.

We would expect to enjoy that benefit going forward and as a result, as you know, we've included it in those four adjustments that we make to revenues up front.

Right.

Okay.

And how big is the base of assets?

Could you remind us that that $540 million came off of this quarter?

$29 billion.

Okay.

And on the government (multiple speakers) --?

Rough numbers.

I think it's in one of the charts in the -- one of the slides in the presentation, but my recollection is it's 72 and 29.

Okay, and can you give any more color on the drivers for the consolidated net interest margin and the improvement this quarter and what might be sustainable from that?

Look, at the end of the day, part of it is obviously going to depend on the pricing of assets, so I think the principal driver not surprisingly was liabilities.

I mean, we are liability-sensitive; given the fact that rates are as low as they are, it's not surprising that net interest margin would pick up.

I think it was up 8 basis points, if I'm not mistaken, on a link quarter basis from 322 to 330.

In part it's going to depend whether I'm right -- and this may take some time to play out -- that over time, if everybody manages to get through this, this could be a very good period for banks insofar as credit becomes regarded as less of a commodity and more of a precious asset, which may lead to some secular repricing; because I think if I look back on it based on my past life, I think the fact is that there was mispricing at risk, and there was a mispricing of credit generally, to the extent that that reverts more to historical norms.

And assuming there's no real spike in rates, that should enhance margins over time.

I think the industry as a whole is hoping that that's the case.

Obviously -- and at this stage is being supported by very low rates because there's an offset as you well know in the other side just in terms of non-accrual assets; but having said that, once we get through it, I suspect that there's a chance that margins may in fact go back up.

Okay.

Last question, could you give us some comments on international consumer credits?

It's very hard for us to analyze that.

And just where are your greatest concerns in terms of the international consumer credit deterioration?

Maybe specifically comment on EMEA and Latin America where the trajectories are moving up there.

I have in my own review over the past couple weeks and I think it's fair to say the countries of greatest concern are UK, Spain, Greece, Mexico, India.

So I have spanned the globe with those countries.

If you look at the international versus the North American business, I've actually been through that analysis as well; and not to be flip about it, but there's not much to choose between the two.

I think the trends that you see among consumers and with respect to credit losses are broadly very similar.

I think it's probably fair to say that there has been a slightly more of an acceleration in terms of credit deterioration internationally versus the US over the past couple of months.

Having said that, they are reaching basically the same nominal levels.

And the interesting thing is that there does not seem to be, in one respect, any relief from what clearly is a global economic condition which is affecting consumers not only here but also outside the United States.

As I said, there's very little to choose between the two.

If you look at it in terms of loss rates and net credit loss ratios, obviously, we are thinking about reserving broadly both in connection with North America and with respect to internationally; but interestingly enough, even if I were extremely pressed and you said take your choice, it would be a toss up.

Okay and that also reflects differences in underwriting or risk layering that you may have done in international versus domestic?

Well, there's one confounding factor, if you will, in domestic which, of course, is the securitization trust on the credit card side.

And as you know, the retail cards obviously have a higher loss ratio than the branded cards, so that is one thing that at least on a nominal basis drives North America higher.

We are continually focused, as you might well imagine, on risk mitigation efforts.

Generally, those risk mitigation efforts are not only in the United States but around the world.

And the fact that -- did you grow faster internationally?

Is that a risk -- is that a factor (multiple speakers) --?

I don't think so.

I don't think there's really much to choose in terms of the growth rates either by and large.

It's been pretty consistent across-the-board.

Okay, thank you.

Sure.

Your next question comes from the line of Richard Ramsden with Goldman Sachs.

Yes, hi, good morning.

I just have a couple of questions.

The first is I just want to clarify that there's been no change in the way in which you're either recognizing or reporting non-performing assets on the $300 billion of assets that are in the risk sharing agreement with the government.

There is not, Richard.

Okay, so those are just flowing through non-performing assets in a normal way?

They are.

That's right.

Including losses.

Okay.

And then the second question, just going back to the exchange offering for the preferred, if you don't think that the stress test is going to have an impact on the offering, why are you delaying it?

What's the reason?

I think I've been careful not to say anything about the stress test principally because we've been instructed rather expressly by the regulators not to say anything, but just to take your question in its premise.

Irrespective of what the outcome is, positive, negative, indifferent, that's going to be a source of great interest to the market.

And I guess the way I thought about this -- and I would be the first to admit that I was the one who suggested it -- if you were about to do, putting the government to one side, a $27 billion equity offering, and you are weeks, not months away from the revelation of information that is likely to be of great interest to the market, it makes perfect sense to delay that offering to allow for the digestion of that information.

It's really as simple as that.

Okay, no, that's fine.

I just wanted to clarify that.

Thanks a lot.

Sure.

Your next question comes from the line of Chris Kotowski with Oppenheimer & Company.

The one thing I had noticed as kind of a pleasant surprise was that corporate non-accruals were up only about 12%, something like that, and most of the other reporting banks that I've seen were up more in the 20 to 30% range.

And I was just wondering, is that just a timing difference?

Did you have accelerated recognition in the fourth quarter?

Is there any reason to think your corporate credit would exhibit different characteristics than what we see at the industry at large?

And also I wonder if you could comment on some of the key trouble spots like the auto industry and your exposure there?

Sure.

As I'd said earlier, our loan portfolio by and large -- and obviously there are going to be exceptions as essentially large global corporates, there are exceptions -- you would expect in that context in the absence of severe economic distress for that portfolio to perform reasonably well.

It's obviously going to be driven by the economy but it should perform reasonably well.

As you know, the losses that we've had in the past in some respects have been driven, as you know, by highly levered transactions.

And in fact, we've seen a couple of examples of that over the past couple of years.

So I'm not surprised in one respect that we wouldn't show the immediate impact in terms of non-performers, because the other factor is that our losses and our non-performers tend to be relatively lumpy in that business, just given the nature of our business.

The corporate NPA did go up during the fourth quarter, as you well know, and we went through that in one of the slides.

We obviously crystallized one of those losses in the first quarter, which I'd mentioned, I think, by name, and we're continuing to watch it closely.

With respect to the autos, obviously we do have exposure to the auto and related industries including suppliers.

We feel that we are well secured and/or adequately reserved in connection with those exposures.

Assuming that there is some orderly resolution of the situation, as I said, having spent a fair amount of time with our risk people and discussions with the business guys downtown, I think we feel as if we're pretty well positioned.

All right, and just second question, have you disclosed the gain on the Nikko sale?

To my knowledge there is not yet -- there is no Nikko sale.

Oh, okay.

That's all.

Your next question comes from the line of Moshe Orenbach with Credit Suisse.

Thanks for taking question.

You mentioned the repricing benefit in cards.

Have you kind of sized how much that could be kind of in basis points on the portfolio?

Could you discuss a little more maybe if either that specifically or if not that specifically, kind of how we should think about the steps you took?

I can't, and as I said, I'd be the first to tell you if I didn't know.

I'm not sure that we have sized it, but we -- it may be that you could follow-up with John on that question.

It looks as if somebody has just written me a note that essentially the benefit was $2 billion plus, annualized?

Yes, annualized.

So $2 billion annualized in this quarter and you expect it to be -- to continue to increase or to be $2 billion kind of at an annual rate during 2009?

It should, it obviously, given -- it should level out.

In other words, there's going to be a point at which it begins to pick up and then it normalizes and flattens out, but as I said that's not something I've looked at so we'll have to get back to you.

Okay, just a quick follow-up.

On a different matter, the logic of continuing to pay the dividends on the preferred until the exchange offer, how does that -- why is that?

We just think it's the fair thing to do.

Until they're swapped out, it makes sense to continue to pay the dividends.

Okay, thanks.

Sure.

Your next question comes from the line of Ed Najarian with ISI Group Inc.

My question has to do with the operating expense run rate.

It looked like taking this quarter's operating expense run rate and annualizing it, you're already a little bit below your full year kind of run rate target in the low -- you're sort of at the $48 billion to $49 billion range annualized this quarter?

I think adjusted, it would be $49.2 billion, I think.

Okay, yet this obviously seems like a quarter especially with the trading revenue where your revenue performance might have come in a little bit higher than expected, so I'm just looking for you to sort of rationalize that a bit.

Well, I'm not (multiple speakers) --

Should we expect expenses to potentially go up in future quarters from here?

I think what you heard me say was that we had established a goal of 50 to 52.

I said we were hoping to bring it in at the lower end of that, so frankly had $800 million of hedge in it, if you will.

We're obviously very focused on expenses.

We're going to try and get them to be as reasonable as they can, consistent with not starving the businesses or our employees, but we're certainly aiming to do better than 50.

Whether we do or not, I'm not sure, but that is our goal, as I had suggested.

On the revenue -- the one thing I do know that in one respect we can control is expenses.

What we can't -- what we have some influence over but no ultimate control is revenues, and that's where we're very intently focused to make sure that we can sustain the revenue momentum.

But to your point -- and this may be the ultimate import of it -- Vikram has said that we're very much interested, not surprisingly, in generating the strongest operating margin we can, so that we're in a position to absorb the inevitable credit losses that will flow through.

And this quarter, if you look at it on a reported basis, our operating margin was $12.7 billion.

And that obviously put us in a position to absorb $10.3 billion in credit losses and to report net income.

The challenge for us going forward is to make sure that we have an operating margin revenues versus expenses that is adequate to deal with what inevitably are going to be losses during the course of the year.

Can we think about the current quarter at -- I guess I would have thought maybe there would have been a little bit higher expense rate because -- related to incentive compensation because of the strong trading revenue and some of the strong banking results.

Is there any way to think about that from an incentive comp accrual standpoint?

I think you can think about it as one quarter.

Not to be flip about it but at the end of the day, as you know, we don't pay based on a quarter.

We pay based on the year.

Clearly we have room to go up on the incentive comp front.

Having said that, it was one quarter.

Okay, thank you.

Sure.

Your next question comes from the line of Andy Baker with Jefferies.

Hi, thank you for taking the question.

Just wondering, is there any reason to think that the outcome of the stress test, the results of the stress test, would impact your thinking on whether or not you want to do the preferred exchange?

I mean, if you turned out to be in a very, very strong capital position and didn't feel you needed the incremental common equity?

Andy, as you know, as I said earlier, I've gotten express directions from the regulators not to comment on the stress test.

And I think unfortunately, I hope you'll forgive me, I think I will leave it at that.

All right, understood, thank you.

Your next question comes from the line of [Sam Saba] with JPMorgan.

Hi, regarding the press, you have the three buckets, the government, the private and the public.

Right.

If you did consider or reconsider the idea of raising the strike price to let's say $4.50, you'd cut the dilution on your equity by about 6% and it wouldn't affect the probability of getting your TC updated to $1 billion; so considering that, I don't really understand why you wouldn't do that.

We have certainly considered that dynamic.

As you know we have agreements with the privates and we have an agreement with the government at $3.25.

Right.

And the fact is that leaves the $15 billion of public.

Having considered the pros and cons as you suggest, I stand by the earlier statement which is at this stage we can't envision changing either the stock price or the conversion ratio, understanding your point.

Okay, what's the downside for doing that, sorry, for not increasing the strike price?

As I said we have an agreement with the privates.

We have an agreement with the government and we've thought about precisely what you're thinking about, and we've concluded that we can't envision circumstances in which we wouldn't leave the stock price and the exchange ratio where they are.

I understand that, but I'm --?

I'm not going to state, just at the end of the day you aren't going to draw me out any farther, so we might as well just stop.

All right, thank you.

Sure.

Your next question comes from the line of Vivek Juneja with JPMorgan.

Vivek, how are you?

A couple of questions following up on the preferred.

Thank you.

A couple of things.

When you talked about your balance sheet needs to shrink how should we think about that, Ned?

Is there room to do that further?

Are there plans to do that for one?

Vivek, as you know, I think if I look at it, this is just rough numbers.

CapEx has I think, shrank to $120 billion on a link quarter basis if I'm not mistaken and risk assets as you know were up marginally but that was because of the consolidation of the credit card trust.

When I think about the balance sheet and I think Vikram has been clear about this, we've been focused since he arrived on trying to reduce legacy assets.

We're still very much focused on that.

As you can see on that chart on page 6 or 7 or whatever it is we still have $101 billion of key risk assets, $29 billion of which are now in mark-to-market, having said that over time, we would clearly like to exit some of those assets given the losses that they've generated in the past and are interested in reducing the risk profile.

Second piece is we've put a bunch of assets into holdings as you know which as I went through before we've described as the objective being either to optimize, manage or wind down.

There are substantial parts of the assets in holdings that we have described as special assets that we would be interested in winding down.

So if you asked me to just sort of project that over the future and not netting any growth which obviously we would hope to have, I think it's still fair to say that there are hundreds of billions of assets that we would think about exiting over time.

Okay.

And then looking at the backstop assets, are you going to continue to build reserves for those until you get to your $29 billion amount that you have to bear or you talked about in previous quarters about the fact there was when you announced this back stop agreement that nothing was going to change.

Is that still the plan so that's part of your reserve build that's going in there or is anything changing on that?

There is nothing changing, Vivek.

As you know, as I think I said earlier, the losses there are flowing through as well so obviously the reserves to the extent there are losses associated with that would flow through so to the extent we had losses in the first quarter essentially they showed up in the numbers that you see so they aren't any more insulated than as a construct in terms of the government insurance program.

They are still part of our balance sheet and we are still treating them accordingly.

In terms of net charge-offs, Ned, can you give us a little more color in terms of on your home equity portfolios what you're seeing as you think about first mortgage versus second mortgage you've given us some break out in the appendices, but as you look out, any sense of where you expect them to peak at this point given unemployment has risen so sharply in the last six months and particularly in the last three months where you think it is headed to?

I think we see them headed up, no question about that.

Having said that, in that respect, your guess is probably as good as mine in terms of predicting what's likely to happen.

I think it's probably fair to say that we think the housing price decline hopefully is going to bottom out at here at some point which presumably as you know is probably the biggest factor driving the second just in terms of the home values and so forth, but I don't know that we see much to choose frankly, between the two.

In other words there's obviously been defaults in non-performers with respect to primaries and seconds and I think it's just part of the generalized environment in terms of unemployment and falling home prices but I wish I could predict where they're going to end up.

We certainly hope they are going to moderate but having said that we aren't confused about the fact they may very well deteriorate over the coming quarters.

As I said we're hoping that by the end of the year, we might be in a position to see some daylight and to begin to reduce reserve builds that were otherwise going to incur during the course of the first part of the year, but that's the wildcard.

I think it's the wildcard that everybody faces and that's why we're as intent as we are in trying to generate that operating margin that I described earlier.

Okay.

On the second mortgages, the net charge-offs on the over 90 bucket you've given us the DPD.

Any sense of where the net charge-offs were on those?

On the seconds I don't know but we could probably get back to you on that.

I don't know off the top of my head.

Okay, thanks.

Sure.

Your next question comes from the line of [Kent Escalara] with RBC Capital Management.

Yes, hi.

Hi.

Again, with regard to the preferred exchange, you stated that you are delaying to allow the preferred holders to digest the stress test results.

Is it fair to say that this factor alone is 100% responsible for your decision to delay?

I'm sorry I missed the last part of your question.

You mentioned that you were delaying to allow press holders to digest the stress test.

I don't think I'd say that but go ahead.

Is it fair to say that this factor alone is 100% responsible for your decision to delay?

I think I described what was 100% responsible for my decision to delay which was that irrespective of the outcome of the stress test which I've been careful not to comment on, that's going to be information that's relevant not just to preferred holders but presumably to the market as a whole and as a result we thought the sensible thing to do would be to wait to launch the offer until we had the results of the test.

It's no more complicated than that.

Okay so there were no other factors then involved in deciding to delay?

No and the reason I'd say that with some confidence is I'm the one that came up with the idea.

Okay.

And lastly, you mentioned that the Company discussed whether to change the strike but decided not to or considered, outflowed the idea?

There were no active discussions of it.

The fact is that not surprisingly, that's one of the factors that you would look at given what's happened to the stock price we had pre-existing agreements, obviously we have thought about it, we have concluded as I said that we can envision circumstances under which we would change it.

Okay.

Do you think it's conceivable that the preferred offer would be cancelled at any point?

I think there's a 5% chance the sun doesn't come up but the short answer is no.

Okay.

All right, thank you.

Your next question comes from the line of [Michael Schwartz] with Redwood Partners.

Hi, I have a question about the Geitner plan and whether you guys are going to partake in the PPIT.

Yes, Michael, I think two things.

One is, as I think Vikram has said we applaud the government's efforts and the Treasury Departments in particular to support banking system in the economy.

I've actually been through the PPIT plan in some detail.

I can't say that I've done it within the past week or so but certainly when it came out I went through it.

As you know there are an awful lot of details to emerge with respect to the PPIT, which is the market has been very much focused on.

We're going to follow-up closely as it evolves.

One of the critical issues is going to be whether it makes economic sense given how that program is structured, given the amount of leverage provided, given the market tenor at that stage as whether it makes sense for us economically to participate.

That's how we plan to analyze it in terms of thinking whether it makes sense to do it or not.

The one thing that I would point out which you're acutely aware of is if we do have this $300 billion ring sense which we paid the government $7 billion for in terms of protecting the tail on those assets, it's perfectly conceivable that that might affect our analysis at least with respect to that $300 billion whether we were to participate or not, but I think the basic message not surprisingly is we're watching it closely, we think it's an interesting idea conceptually.

There are a lot of details that will be forthcoming that we'll have to analyze in the context of what makes sense economically for us at the time.

Yes, okay, great.

And I have just one follow-up question about the timing of the exchange offer for the preferreds.

How many days after the stress test is out there will you think it's enough before you launch the deal?

My own judgment at this stage, lord knows I have been wrong in the past, is that it should not be many.

Having said that there will be logistical issues around crossing T's and dotting I's not only with the Commission but with respect to the disclosure if any, that is necessary but we would expect it to be forthcoming shortly after.

Great.

Okay, thanks so much.

Sure, thank you.

Mr.

Kelly there are no further questions.

Terrific.

Thank you very much.

I appreciate it.

I appreciate your patience and look forward to working with you.

Thank you.

Ladies and gentlemen, this concludes Citi's first quarter 2009 earnings review.

You may now disconnect.