花旗銀行 (C) 2010 Q4 法說會逐字稿

Hello, and welcome to Citi's fourth-quarter 2010 earnings review with Chief Executive Officer Vikram Pandit and Chief Financial Officer John Gerspach.

Today's call will be hosted by John Andrews, Head of Citi Investor Relations.

We ask that you please 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.

Andrews, you may begin.

Thank you, operator.

Good morning and thank everyone this morning for joining us.

On the call today, of course, Vikram will take us through the presentation initially followed by John Gerspach, our CFO, who will take you through the detailed deck which is available on our website.

Afterwards they will be happy to take your questions.

Before we get started I would like to remind you that today's presentation may concern forward-looking statements which are based on management's current expectations and are subject to uncertainty and changes in circumstances.

Actual results may differ materially from these statements due to a variety of factors including the precautionary statements referenced in our discussion today and those included in our SEC filings, including without limitation the Risk Factors section of our 2009 Form 10-K.

With that said and out of the way, let me turn it over to Vikram.

Vikram?

John, thank you and good morning, everybody.

Thank you for joining us today.

2010 was a very good year for Citi.

We made excellent progress in executing our strategy in every major area.

And as a matter of fact, if you had said a year ago that we would have accomplished what we have, I am not so sure too many people would have believed it.

Yet we were profitable in each quarter, earning $10.6 billion for the year.

Revenues increased for the quarter and for the year in two of our three core businesses, which are transaction services and consumer banking, and securities and banking had strong full-year results.

Entering 2010 our primary goal was to become consistently profitable, and we achieved it.

Another goal was to continue to reduce assets in Citi Holdings and we did so by $128 billion.

Remaining assets are now 19% of our balance sheet, and that is down from almost 40% of the balance sheet at their peak.

We also have been building for the future from opening branches in Asia to making new investments in technology, to attracting top-notch talent to our consumer and institutional businesses.

We are building a position of strength that will allow us to harness the world's growth trends.

And, of course, the capstone to the year was the sale of the government's remaining shares of common stock.

To date US taxpayers have earned a profit of approximately $12 billion on their investment in Citigroup.

We will always be grateful for the investment they made in our company and for standing by us through this financial crisis.

Specifically for the fourth quarter, our client business and flows were solid across the board and we saw strong growth in our consumer franchise, especially outside the US.

On the institutional side, although transaction services and banking performed well, the revenues in markets reflected weaker trading performance.

And, of course, we are happy to see our credit spreads improve as much as they did.

That is a good sign -- not only of our progress but also it will reduce our costs of borrowing over time.

But of course it means that we had to take a $1.1 billion charge due to CVA.

For 2011 we will build on the foundation we put in place and accelerate our strategy for Citicorp.

We will make investments to increase our lead in the emerging markets.

We will seek to become a leader in digital banking and mobile payments, and we will continue to recruit top talent, building on the key hires we made last year.

And we will do so despite a challenging economic backdrop.

The effects of the financial crisis are still working their way through the system and I think that macro trends will dominate micro trends, especially for the next few quarters.

And although there are positive signs in the US economy, the housing market yet has to recover, job creation has been weak, and internationally excessive government leverage is still hampering a recovery in the eurozone.

We continue to build our capital base.

Our Tier 1 common ratio now stands at 10.7%, up from 9.6% at the beginning of the year.

Through earnings and reduction of Citi Holdings we have built robust loan-loss reserves of $40.7 billion.

We have participated in the stress test with the regulators and, subject to their guidance, we still expect to be in a position to return capital to our shareholders in 2012.

Summing up, I believe we have the right business model, the right strategy for our companies, present and future, and we are executing with discipline.

The economic environment remains uncertain, but our path for the future is clear.

We have steadily built a foundation capable of producing consistent profitability and our focus now is on achieving sustained and responsible growth.

With that, I would like to turn this over to John Gerspach, and then we will come back later and take some of your questions.

Thank you, Vikram, and good morning, everyone.

Starting on slide two, on a full-year basis Citigroup reported revenues of nearly $87 billion for 2010.

Operating expenses totaled $47.4 billion, credit costs were $26 billion, down 50% from prior year levels on a comparable basis, and for the full year we earned $10.6 billion in net income or $0.35 per diluted share.

We earned nearly $15 billion in our core Citicorp business with earnings in Asia and Latin America contributing more than half of the total.

Citi Holdings generated a loss of $4.2 billion.

Now turning to the quarter on slide three, Citigroup reported fourth-quarter net income of $1.3 billion or $0.04 per diluted share.

These results were significantly affected by three factors.

First, CVA was a negative $1.1 billion as Citi spreads tightened in the fourth quarter, particularly following the US Treasury's sale of its remaining Citi shares in December.

Second, revenues in securities and banking were lower due to weaker trading performance in the fixed income and equities businesses.

And third, expenses were $12.5 billion, up 8% from the last quarter and above our prior guidance.

Of the expense increase, more than half was due to the combined impact of foreign exchange and higher legal and related costs while the remainder was attributable to severance, volume-related growth in certain businesses, and continued investments.

On the positive side, credit continued to improve in the quarter with net credit losses declining 11% to $6.9 billion, and we recorded a net loan-loss reserve release of $2.3 billion.

Turning now to Citicorp and Citi Holdings on slide four, credit costs continued to decline in each segment, driven by improvements in both consumer and corporate credit.

Citicorp reported revenues of $14.3 billion and net income of $2.4 billion.

The underlying business drivers for Citicorp continued to show momentum in the fourth quarter, and as an example, for the second consecutive quarter we grew both consumer and corporate loans in Citicorp, primarily in the emerging markets.

Sequentially, end-of-period consumer loans were up 3% and corporate loans grew 4%.

Citi Holdings reported revenues of $4 billion and a net loss of $1 billion.

Citi Holdings ended the year with $359 billion of assets, down $62 billion during the quarter and $128 billion for the year, including the sale of Student Loan Corporation.

On slide five we show a nine-quarter trend for Citicorp's results.

CVA was negative $1 billion for Citicorp in the fourth quarter compared to a positive $99 million last quarter.

Excluding CVA, Citicorp's revenues were $15.3 billion, down 6% versus the prior quarter due to lower revenues in securities and banking.

Operating expenses of $9.4 billion were up 6% versus the prior quarter.

Roughly a quarter of the increase was due to the impact of foreign exchange.

The remainder was primarily due to higher legal and related costs, volume-related growth, and continued investments in our core businesses.

Citicorp's net credit losses were $2.7 billion, down 12% from the previous quarter driven by Citi branded cards in North America and lower corporate net credit losses.

We released $741 million in net loan-loss reserves, up from $426 million in the third quarter as higher net releases in Citi branded cards and our corporate portfolio were partially offset by lower releases in our international consumer businesses.

Excluding CVA, earnings before taxes declined 16% to $3.9 billion.

Slide six highlights our North America consumer banking business.

Revenues of $3.6 billion were down 5% sequentially.

Lower revenue in cards reflects a charge for enhancements to our ThankYou Rewards program as well as the continued impact of CARD Act.

Lower retail revenue was lately due to lower refinancing gains in the mortgage business.

Expenses were up 7% to $1.6 billion, reflecting a one-time benefit in the prior quarter as well as higher legal and related costs.

Credit costs declined 29% to $1.4 billion.

Net credit losses were down 10% to $1.8 billion due to continued improvement in Citi branded cards and we recorded a $348 million net loan-loss reserve release.

Net credit margin increased 1% to $1.8 billion as the decline in net credit losses more than offset lower revenues.

While average loans were flat to slightly down versus the prior quarter, end-of-period card loans were up 1% sequentially and retail loans were up 4%.

In cards, open accounts were stable versus the prior quarter and purchase sales grew 4% sequentially.

While overall purchase sales declined versus last year due to a lower account base, sales per active account grew year-over-year for the fourth consecutive quarter.

Turning to slide seven, our international consumer banking businesses had revenues of $4.6 billion, up 4% sequentially with growth across all regions.

This growth reflects strong momentum in underlying business drivers as well as the impact of foreign exchange.

Underlying revenue drivers were positive again this quarter; however, revenue growth was muted as spreads remained under pressure.

We grew our average deposits in every region during the quarter, and average loans grew 5% sequentially in both Asia and Latin America.

Card purchases sales were up 14% sequentially and investment sales grew 11% as strong growth in Asia and EMEA was offset by a decline in Latin America as customers continued to shift to longer-term securities.

Expenses were $2.8 billion, up 10% from the prior quarter, reflecting the impact of foreign exchange and continued investments in the business.

Credit costs were up 70% to $593 million, driven by a lower net loan-loss reserve release during the quarter.

NCL dollars were stable.

These credit trends reflect these regions being substantially further along in their economic recovery and, hence, much closer to a normalized credit environment than North America.

On a rate basis, international net credit losses continued to improve and NCL dollars were flat against a growing loan balance.

Net credit margin increased 5% sequentially to $3.8 billion in the fourth quarter driven by revenue growth.

Slide eight shows nine quarters of business drivers and financial performance for international consumer banking.

Following a period of repositioning in 2009, we returned to growth across every significant metric in 2010, reflecting both economic recovery in these regions as well as our renewed investment spending.

Year-over-year average loans and deposits were up 12% and 11%, respectively.

Trends in card purchases sales and investment sales were also up with full-year 2010 results above 2008 levels.

This growth in underlying business drivers is reflected in our financial results.

On a full-year basis net credit margin of $14.3 billion in 2010 was up 21% over the prior year and net income more than doubled, reflecting the additional benefit of loan-loss reserve releases.

Slide nine shows our securities and banking business.

Excluding CVA, revenues of $4.6 billion were down 17% from the third quarter driven by weaker revenues in fixed income and equity markets, partially offset by growth in investment banking and lending revenues.

In investment banking revenues grew 25% to $1.2 billion as significantly higher equity underwriting revenues driven by Asia IPO activity and stable debt underwriting revenue were partially offset by a decline in M&A fees.

Ex-CVA equity market revenues were $808 million.

The $254 million sequential decline primarily reflects weaker trading revenues linked to our derivatives business and principal positions.

Fixed income market revenues, ex-CVA, were down 32% to $2.3 billion.

The decline was primarily attributable to weaker performance in market-making activities to facilitate client needs.

Lending revenues were $185 million compared to a negative $18 million in the prior quarter, driven by smaller hedge losses on continued spread tightening for corporate credits.

Private bank revenues, excluding CVA, were up 3% to $506 million.

On a regional basis, revenues excluding CVA grew 8% sequentially in Latin America and 3% in Asia.

Total operating expenses were up 2% versus the prior quarter.

Credit costs were a benefit in the fourth quarter as net credit losses declined 54% to $132 million and we released $194 million in net loan-loss reserves.

Moving to transaction services on slide 10, revenues of $2.6 billion were up 1% from the third quarter, driven by growth in Asia and Latin America.

Treasury and trade solutions was down 1% as higher trade revenues, increased deposits and higher fees were more than offset by spread compression.

Securities and fund services grew 6% sequentially, driven by higher volumes.

Overall, transaction volumes and new mandates remained strong across both businesses during the quarter.

Asset growth was driven by trade finance with end-of-period trade assets up 14% sequentially and nearly double versus last year.

Average deposits grew 4% sequentially to $353 billion and assets under custody were up 2% to $12.6 trillion.

Expenses of $1.3 billion were up 7% from last quarter, reflecting both higher volumes and continued investment to support the business.

Slide 11 shows Citi Holdings' assets.

We ended the quarter with $359 billion in Citi Holdings or 19% of total Citigroup assets.

The $62 billion reduction in the fourth quarter was comprised of $48 billion of asset sales and business dispositions, including $31 billion from Student Loan Corporation and $10 billion of sales from the Special Asset Pool, approximately $12 billion of net run-off and paydowns, and $2 billion of net cost of credit and net asset marks.

On slide 12 we show a nine-quarter trend for Citi Holdings' results.

We narrowed the loss in Citi Holdings to $1 billion in the fourth quarter.

Revenues were up 3% to $4 billion as higher revenues in brokerage and asset management and the Special Asset Pool were offset by a decline in local consumer lending.

Expenses were up 7% to $2.4 billion and credit costs were down 13% to $2.9 billion.

Looking at Citi Holdings in more detail on slide 13, revenues in brokerage and asset management were up sequentially to $136 million reflecting a higher contribution from the Morgan Stanley Smith Barney joint venture.

In local consumer lending, revenues were down 4% sequentially to $3.4 billion as gains on asset sales were more than offset by lower revenues on a declining loan balance as well as a refund reserve build related to our consumer finance business in Japan.

In the Special Asset Pool, revenues were up 36% to $426 million in the fourth quarter mainly due to higher gains on asset sales during the quarter.

Expenses were up 7% sequentially to $2.4 billion, reflecting higher legal and related costs and severance.

Credit costs were down 13% sequentially as credit trends continued to improve in both our consumer and corporate portfolios.

Total net credit losses were down 10% to $4.2 billion and the net loan-loss reserve release was down slightly to $1.5 billion.

Local consumer lending continues to drive the earnings performance of Citi Holdings with $1.1 billion net loss for the quarter.

Slide 14 shows the results for the Corporate/Other segment.

Revenues declined by $450 million sequentially, reflecting lower gains on sales of AFS securities.

Net income also reflects higher operating expenses during the quarter.

Expenses were up by $286 million sequentially, mainly due to legal and related costs.

Assets of $272 billion include approximately $92 billion of cash and cash equivalents and $124 billion of liquid available-for-sale securities.

Slide 15 shows total Citigroup net credit losses and loan-loss reserves.

NCLs continued to improve, down 11% sequentially to $6.9 billion and the net loan-loss reserve release grew 14% to $2.3 billion.

We ended the year with $40.7 billion of total loan-loss reserves and our LLR ratio was 6.3%.

Consumer NCLs declined 8% sequentially to $6.2 billion and we released $1.3 billion in net loan-loss reserves.

Corporate credit was a benefit of $256 million in the fourth quarter compared to a cost of $347 million last quarter.

Corporate net credit losses declined 28% to $664 million and the net loan-loss reserve release grew to $920 million.

Corporate non-accrual loans of $8.6 billion were down 13% versus the prior quarter.

Moving to consumer credit trends on slide 16, as I mentioned, consumer net credit losses of $6.2 billion were down 8% sequentially with continued improvement in North America cards and real estate.

Our net credit loss ratio declined again this quarter to 5.3% and our loan-loss reserve ratio was 7.8%.

In North America net credit losses declined 9% to $5.1 billion, while international net credit losses declined by 6% to $1.1 billion.

Slide 17 shows our international consumer credit trends.

In Citicorp, NCL improvement on a dollar basis is slowing down as we grow our international loan portfolios.

However, on a rate basis, we continued to see NCL improvement in both Asia and Latin America.

In Asia, India continued to show the most significant improvement in both NCLs and delinquencies.

For the region, 90-plus-day delinquencies were relatively flat on a dollar basis and down as a percentage of loans.

In Latin America, NCLs improved on a rate basis driven by cards in Brazil and Mexico and 90-plus-day delinquencies also improved.

Now on slide 18 we focus on North America cards.

Trends for both Citi branded and retail partner cards continued to reflect the improving credit quality of these portfolios.

In Citi branded cards NCLs declined for the third consecutive quarter.

NCLs decreased by 11% to $1.7 billion and 90-plus-day delinquencies were down 12% to $1.6 billion.

In retail partner cards NCLs were down for the sixth consecutive quarter.

NCLs decreased by 10% to $1.4 billion and 90-plus-day delinquencies declined by 8% to $1.6 billion.

For both portfolios early-stage delinquencies also continued to show improvement.

Turning to the mortgage portfolio in Citi Holdings on slide 19, NCLs and 90-plus-day delinquencies in both first and second mortgages improved again this quarter.

We continued to manage down these portfolios.

Compared to the fourth quarter of last year we reduced our first mortgage portfolio by almost 20% to $80 billion and second mortgages were down 14% to $44 billion through a combination of sales, run-off, and net credit losses.

Our total loan-loss reserve balance for mortgages in Citi Holdings currently represents over two years of NCL coverage.

Slide 20 provides more detail on the delinquency trends in first mortgages in Citi Holdings.

30-plus-day delinquencies were down for the fifth consecutive quarter.

Delinquencies declined by 15% to $9.9 billion with improvement across all buckets.

Similar to last quarter, the sequential decline in delinquencies was due entirely to asset sales and trial mods converting to permanent modifications, absent which delinquencies would be up slightly.

During the fourth quarter we sold $1.5 billion in delinquent mortgages, bringing our total sales of delinquent mortgages for the year to $4.8 billion.

Mortgage sales serve to reduce our overall delinquency inventory.

They also eliminate any future risk of default as compared to modifications.

Through the end of the year we had converted a total of $4.8 billion of trial mods to permanent modifications, more than three-quarters of which were HAMP.

We continue to believe that redefault rates for HAMP-modified loans will be significantly lower versus non-HAMP programs.

The first HAMP mods have now been on the books for about 12 months and to date are exhibiting redefault rates of less than 15%.

On slide 21 we provide an update on rep and warranty issues.

The chart on the left shows claims and repurchase activity on a unit basis.

Over the past three years we have received claims on roughly 20,400 unindemnified loans.

At year-end nearly 4,600 of those claims remained pending, which was slightly lower than our pending claim volume at the end of the third quarter.

Of the roughly 15,800 claims which have been resolved approximately 7,600, or nearly 50%, were actually repurchased or made whole.

Based on our current expectations, we believe claims volumes should peak in the latter part of 2011.

The right side of the slide shows a roll forward of the repurchase reserve for our consumer mortgage business.

We began the fourth quarter with approximately $952 million of repurchase reserves.

We added approximately $4 million of reserves arising from new mortgage sales in the fourth quarter and another $248 million related to changes in our estimate of average loss per claim.

These additions to the reserve were charged to our P&L during the quarter as contra revenue.

We realized approximately $235 million of losses during the quarter which were charged against the reserve.

As a result, we ended the year with $969 million in mortgage repurchase reserves.

Slide 22 shows the trend in our key capital metrics.

We ended the year with a Tier 1 ratio of 12.9% and a Tier 1 common ratio of 10.7%.

Our Tier 1 common ratio grew approximately 40 basis points during the quarter, reflecting a 1% increase in Tier 1 common capital to $105 billion and a 2% reduction in risk-weighted assets due in part to the continued wind down of Citi Holdings.

On a year-over-year basis our GAAP assets grew 3% while we reduced our risk-weighted assets by 10%.

In summary, our performance in 2010 creates a strong foundation for sustainable growth.

Where 2009 was focused on recapitalizing the firm and putting into place our new strategy, 2010 saw our return to profitability as we earned nearly $15 billion in our core Citicorp business while we cut losses in Citi Holdings by more than half.

The strength of our international franchise was particularly apparent in 2010 with Asia and Latin America earning over $8 billion, a 14% increase versus 2009, and that growth and profitability was achieved while continuing to invest in these regions.

We made significant progress in reducing Citi Holdings with assets declining $128 billion or 26% versus 2009.

Today Citi Holdings represents only 19% of total Citigroup assets.

Two consistent themes drove our performance in 2010.

First, global credit continued to recover with six consecutive quarters of sustained improvement in credit costs.

And, second, we began increasing our investment spending in international businesses as the pace of economic recovery accelerated in these regions, resulting in strong growth in our underlying business drivers.

Finally, our consistent profitability, combined with the ongoing wind down of Citi Holdings, contributed to our strong balance sheet.

We ended 2010 with a Tier 1 common ratio of 10.7%, up approximately 110 basis points from last year, making us one of the best capitalized large banks in the world.

We remain confident, based on what we know today, that we will be well above the Basel III capital requirements and above 8% to 9% on a Tier 1 common basis in 2012.

Now I would like to discuss some factors which may affect our results in 2011.

In regional consumer banking we believe results will be driven by different trends in North America versus our international businesses.

In North America, if economic recovery is sustained, revenues are expected to grow modestly as loan demand begins to recover, particularly in the second half of the year.

However, net credit margin recovery will likely continue to be driven primarily by improvement in net credit losses.

As always, loan-loss reserve balances will continue to reflect the losses embedded in the portfolio.

Internationally, we have seen the improvement in net credit losses slowing as the loan portfolios grow.

Given continued economic expansion in these regions, net credit margin is more likely to be driven by revenue growth, particularly in the second half of the year, as our investment spending should continue to generate volume growth to outpace spread compression.

International credit costs are likely to increase in 2011 reflecting a growing loan portfolio.

In securities and banking, our continued investments serve to build on an already strong foundation for future growth.

The strength of our franchise should be evident in 2011 as it was in our full 2010 results.

Overall, securities and banking will continue to reflect trends in client activity and global market conditions.

In local consumer lending in Citi Holdings, revenues should continue to decline given a shrinking loan balance resulting from paydowns and continued asset sales.

Based on current delinquency trends and ongoing loss mitigation actions, we expect credit costs to continue to improve in local consumer lending.

Regarding expenses, we expect 2011 expense levels to be in line with our 2010 guidance at $48 billion to $50 billion for the year with some variability across quarters as we continue investing in Citicorp while rationalizing Citi Holdings.

That concludes our review of the quarter.

Vikram and I will now open up the line for questions.

(Operator Instructions) Guy Moszkowski, Bank of America Merrill Lynch.

Good morning.

I was hoping that maybe you could quantify how much of the linked-quarter increase in expenses actually was litigation, which was one of the primary factors you noted.

If you think in terms of the way it breaks down, about $150 million of the increase was due to foreign exchange, about $400 million, more or less, was legal and related matters, $100 million was severance and restructuring, and about $150 million each of investment and volume-driven growth.

Got it.

Thanks.

And within securities and banking, did the core -- the expense increase in comp, which I know you don't break out, did that pretty much reflect -- well, actually I should phrase it differently.

Did the comp reflect the decline in revenue or was it also up sequentially?

Well, as you said, Guy, we don't break out comp for any of our individual businesses, but obviously our comp considerations reflect performance for the full year.

Throughout the year we do our best to estimate what we think we are going to be paying out, so we take all of that into consideration.

I guess what I am trying to get at is whether there would have been a significant increase in litigation type expenses within S&B.

There was some contribution in S&B of litigation, but I wouldn't say that S&B was the primary driver behind the $400 million that I talked about earlier.

And is it fair to assume that a fair amount of that litigation expense would be reserve building related to things like private-label securities?

I know that one of your competitors has talked about not really being able to build for that use through the reserve, but that litigation reserves can be built for that type of thing.

As we said, I think it was last quarter, we believe that the private label -- the types of claims associated with private-label securitizations are going to manifest themselves in the context of litigation.

We made that statement last quarter and that kind of holds true.

But as we said last quarter, to date we have not received a significant number of claims in connection with private-label securitizations.

Obviously, we continue to monitor all the activities associated with this, but given the relative lack of historical experience it naturally kind of follows on that it's difficult to estimate future claims here.

So as with all such matters, we are continuing evaluate our litigation reserves and at the end of the quarter, overall, we feel that we are appropriately reserved and we are going to continue to monitor everything that is going on with private-label securitizations.

The other thing, Guy, is I think you have to put our position of private-label securitizations a bit in context.

When you think in terms of the issuances that were done in 2005 through 2008, we had about a 3% market share and near as we can tell we probably rank eighth among issuers during that time period.

Some of our peer institutions have market shares that are five or eight times higher than that.

So, while private-label securitizations is something that we obviously are continuing to monitor, it, quite frankly, isn't as big an exposure for us as it might be for others.

Thanks.

And then moving to another subject just to explore a little bit further the revenue side in securities and banking during the quarter, we saw a pretty significant fall off in fixed income.

I was wondering if you could give us a little bit more of a sense -- first of all, was a lot of that in December after a more successful first couple of months or was it a little bit more spread over the period?

And can you give us a sense for whether some of the product-related declines that you alluded to in terms of rate were because of the shock that happened in long-term interest rates or was it just more because of a decline in customer activity levels?

I am going to take a pass on going through month-to-month performance, but the decline was not due to a decline in customer volume levels.

Customer activity stayed pretty solid during the quarter and, as we tried to indicate, it really did reflect just weaker trading performance, especially in the fixed income business.

As far as what products may have driven it, I would say that G-10 rates probably contributed two-thirds, maybe, of the decline due to the weaker trading performance.

That is helpful.

The final question I have for you is on the net interest margin, which declined pretty much in line with the guidance that you had given us early in the quarter.

And I was wondering if you could give us a little bit more of a sense for what you thought might happen with net interest margin based on things that you can see now.

I might comment, Guy, about half of that decline that we had in the quarter, half of the 12 basis points was due to the building of the reserve for customer refunds in our consumer finance business in Japan.

So absent that, the decline in NIM would have been closer to six basis points.

And I think that pretty much forms my view as to what might happen going into the first quarter.

We could be looking at something in the mid-low digits as far as a decline in NIM, and then maybe it will stabilize beginning in the second quarter.

Okay, great.

Thanks very much for your answers.

Appreciate it.

Glenn Schorr, Nomura Securities.

Question on deposit trends.

US was up, non-US was down in the quarter, over (multiple speakers).

Glenn, you are breaking up, so I am having a difficult time listening to your question.

I am sorry.

Sorry.

I guess he really broke up.

Glenn?

Better?

Yes, better, Glenn.

Sorry about that.

So a question on deposit trends.

US deposits were up, non-US were down, and non-interest-bearing deposits were up and interest-bearing were down.

And it's just kind of counterintuitive.

I didn't know if that is a repricing thing and conscious effort on your part, or a client trend.

I don't know how to read into that.

A conscious effort on our part.

One of the things that I think we mentioned last time is that we are looking at improving the quality of the deposits that we have.

So we have actually adjusted our pricing to try to capture more of non-interest-bearing and less -- we have got such good demand for non-interest-bearing that there is no reason to go out and continue to be in the middle of the pack as far as time deposit pricing.

So we have pretty much moved our time deposit pricing down in virtually all regions.

There was also -- in North America there was a bit of a one-time shift that we had between now -- in NOW accounts that used to be part of interest-bearing and are now classified as far as non-interest-bearing.

So that contributed in North America to about $9 billion to $10 billion of the growth there.

So it's a conscious trend on our part, but the NOW account shift is a significant one-time item in North America.

Got it; I appreciate that.

With the clear credit improvement and especially on the card side, just curious if you had any thoughts about the private-label card business in general on whether or not you wind up hanging on to that or is that in this potential disposal list.

Well, don't forget, when we set up Citicorp and Citi Holdings it wasn't set up on a good bank/bad bank strategy.

It was actually set up Citicorp represented those businesses that fit the strategy that we had going forward and the businesses that we placed in Citi Holdings, including retail partner cards, were those businesses that just didn't fit.

So I would never say never, but what we would have to look at is to see whether or not retail partner cards or some elements of retail partner cards are now really fitting in with the Citicorp strategy based upon the re-underwriting of the book and the way that business or portfolios in that business are now being managed.

Okay, I appreciate it.

Last one is a quickie.

At the high level, and I very much appreciate the extra commentary on the expenses quarter to quarter, but as a general comment I think people looking at this and saying revenue is a little weaker, albeit it was a trading thing.

But revenue is weaker and expense is still in that same range and you were kind enough to give us expense guidance for 2011.

People want to hear if there is -- if revenues come in a little softer, do you have expense flexibility considering the legal and the investments and the things like that that are going on?

I think that is one of the disappointments in today's results.

Yes, and we will tend to pace our investment spending based upon the way we see those, the other investments playing out.

So the short answer is, yes, we do have flexibility in our expense base.

Okay.

I appreciate it, guys.

Thank you.

Matt O'Connor, Deutsche Bank.

I guess just a bigger picture question on trading.

I can appreciate that it's volatile for everyone and it can depend on the mix quarter to quarter, but just in general it seems like your trading is a little more of volatile.

A very weak quarter here and then all of a sudden a very strong quarter.

Is that just the difference in the product mix or something else that you can point to?

And could we see a little less volatility going forward?

I am not so sure of the underlying thesis in your question, which is why I am having a difficult time answering it, Matt.

I am not sure that our trading is any more volatile than anybody else's, especially when you eliminate the impact of CVA from it.

I think CVA, certainly throughout 2009 and now in the fourth quarter of 2010, maybe has been a bigger contributor to us than to others.

Otherwise, I am not quite sure that we really fall outside the band, necessarily.

Okay.

Obviously we are still getting results this quarter, but -- okay, I guess we can see at the end of the quarter.

But I just -- it has felt like it has been a little more volatile.

Well, one quarter doesn't make a trend and so I think you need to take a look at the overall trading performance over several quarters, if not several years.

But I think it's -- Matt, it's also fair to say that we have a smaller equity business compared to some of the other firms on the street and we are building that out.

We also have a smaller commodities business; that also is being built out.

So a lot more of our revenues are driven by the fixed income business.

Okay.

And then just a couple of model questions going forward.

You had a very modest tax credit this quarter; how should we think about the tax rate next year?

Well, tax rates -- on a normal basis, if you look at us over time, our expectation is that our tax rate should be in the upper 20%s.

27%, 28% would be the right range.

But as long as we are in periods where more of our income is going to be driven by our performance in lower tax rate jurisdictions -- in other words, as we are continuing to rebuild the North America business, particularly the earnings stream in North America consumer, our tax rate will be below the numbers that I just quoted.

Okay, that is helpful.

And then just lastly, another follow-up on the expenses.

As we think about 2011 expenses you mentioned some of the puts and takes in terms of investment spend as well as assets freeing up or as you run off assets that frees up some expenses.

Should we think about the first half of expenses being higher or lower than the second half, or more of a steady throughout the year?

I would look at it more as a steady-state type of thing.

I am not going to say that our expenses are going to be back-end loaded or front-end loaded.

I think we will have a little -- obviously we will look to pace investments based upon where we are so, if anything, the expenses might tend to be a little back-end loaded.

But I don't think it's going to be a huge trend.

Okay.

All right, thank you very much.

James Mitchell, Buckingham Research.

A couple questions; one on the loan-loss reserve in cards.

You guys, I think over the year-to-date have probably released just a little bit over $300 million in reserves where some of your peers I think, even though they are slightly larger in the card business, have released multiple billions.

You have had two quarters in a row of improvement.

When should we start to see a more significant release on the Citi card portfolio?

Well, as we always say, when we take a look at reserves we try to make sure that the reserves reflect the losses that are embedded in those individual portfolios.

So as we get more confidence that the losses embedded in that portfolio are truly declining, you are likely to see continued reserve releases.

I can't tell you that you are suddenly going to see a $1 billion reserve release.

We don't tend to build them in big increments like that and we don't tend to release then in big increments like that.

Well, your reserve ratio is quite high relative to peters, obviously, right?

And they seem a lot --pretty confident in releasing.

But obviously that is fine.

On the [iBank] side, may be getting to the expense question in another way, year-to-date I think if you normalize for the DVA or CVA, however you want to define it, your revenues are down close to 19% in S&B but expenses were up, I think, 11%.

Obviously, you have put a lot of investment into this year.

Should we start to see, assuming we have a better revenue environment, some operating leverage on that expense base in 2011 and beyond?

I am not going to predict operating leverage, especially in a business like securities and banking.

One thing I would say is 2009 I do think that we had somewhat outsized performance coming out of the first quarter in 2009, so that clearly is a difficult point of comparison.

And as we have said, our view is that we had weaker trading results in the fourth quarter so we will see how we perform.

Our expectation is that we will pick up that performance during 2011.

As far as investments, we have also been I think pretty clear that we had made significant investments in building out our corporate banking franchise, and earlier in the year we were still building out equities.

We think a lot of equities is now done.

The corporate banking franchise is still an area where we have got, I think, some work to do, but I think most of the investment work in Securities and Banking now is behind us.

Okay, great.

That is helpful.

One last question on the securities investment portfolio was down, I think, $21 billion on a period-end basis.

Is that sort of positioning for the rate environment?

What is your stance vis-a-vis rates at this point?

When you take a look at -- you are talking about the investment portfolio, the investment security, the AFS, right?

Correct.

Okay.

We did -- we are in the position -- we are in the midst of repositioning that book given the rate environment.

I am not going to make a public statement as to where we think rates are going, but it's just that obviously we did take some of the securities off the table and that is one of the reasons why our cash balances are higher right now.

And so you will see the results of that repositioning as we get further into the first quarter.

Okay.

Thanks a lot.

Betsy Graseck, Morgan Stanley.

A couple of questions.

One was back on the sales and trading commentary you were giving one of the reasons for the down quarter was market-making as well as principle position.

I am wondering how to read that in terms of what might be permanent versus cyclical.

Is part of this your positioning for the (inaudible) versus just market making, missing the market, or what have you?

Well, we have always said that proprietary trading or principle positions is a relatively small part of overall business.

We have said publicly that proprietary trading represents less than 2% of our firm revenues.

And there is a small prop business that is in equities.

During the third quarter it generated revenues of about $150 million and virtually generated no revenues in the fourth quarter.

So that is $150 million out of the $250 million overall decline in our equity markets revenues, ex-CVA, quarter on quarter.

Okay, thanks.

Separate question on capital.

I know that the proposal period is ongoing right now with the regulators; you probably can't talk about what you have asked for.

But I just wanted to ask if you are thinking about whether or not you can do anything this year.

I know that, Vikram, when you opened up in your opening remarks you discussed returning capital to shareholders in 2012.

Is that the earliest date that you are anticipating a return to -- of capital to shareholders?

Well, Betsy, obviously all of us still have to go through the process with the regulators and I think that is going to be informative for us, all of us.

But as importantly, we want to make sure that we are exactly in the right place on Basel III, including, by the way, as I have said in the past, we think it's always prudent to carry a little bit of a cushion.

You take all that into account; we still think 2012 is the right year for us to return capital.

I would think you are looking at your business as well as to how much capital you think you need to hold to run your business.

Can you talk to what you think those numbers are over time?

Well, I think some of that is -- again, let's start the other way.

A lot of that is the decline in Citi Holdings and the risk that goes down through that, and that is a continual process.

We are still in the process of selling a couple businesses there; that should take risk down.

We have got assets in SAP that are going to come down as well.

And so when you look at risk-weighted assets coming down, that is going to be the biggest contributor.

We have said in the past that some of that we would like to reinvest in building out Citicorp, although that depends on how and where the opportunities that help our clients are going to be.

So that is part of our thinking and what drives us to say what John Gerspach said earlier that if 8% to 9% is the kind of range we want in Basel III, 2012 is the year that we ought to be able to achieve that.

Okay.

So did you ask for capital action in the proposal to the regulators?

Well, you know we can't tell you what we say to our regulators and what they say to us, but what I can tell you is what I have said.

Again, 2012 that we think we will have the ability to return capital, of course based on our discussions with our regulators.

Okay.

On retail partner card I noticed that you retained the Zale's account.

Would you be able to bring retail partner card from Citi Holdings into Citicorp before those marketing agreements are up or would it be a rebid at marketing agreement, you win, you keep them in Citicorp?

How should I think about that?

Well, I think the way to -- let's start the very big picture.

The card business is very different than when we moved the partner cards into the Citi Holdings, and that is a consideration that we are well aware of.

Having said that, the biggest consideration for us is to run the partner cards in a very optimal way.

And Zale's is an indication of that, because there is a lot of franchise value in that and there is a lot of value in that particular business.

And we are building that out.

We have done nothing to change our view that it's still in Citi Holdings, and that remains the driving concern.

But I will also tell you that, as with everything we have done through Citi Holdings, our primary goal still continues to be we won't do anything with assets that is not in our shareholders' interests.

And we have clearly that in mind.

And I don't think that has -- that is not going to be impacted by which portfolio we have or how it turns over or any of that.

It really comes down to the kind of value we think that card business represent to us and we want to recognize it for you.

Right.

So if it's positive, you would bid for it, right?

If you think there is going to be an accretion to your --

Again, what I would say on that is we haven't changed our mind.

It's still in holdings and it is still part of the assets that we want to rationalize, but obviously as we do that we will look at every other option before we make a decision.

Okay.

And then last on ROA outlook, Vikram, in the past you have talked about what your ROA outlook is for Citicorp.

Has there been any change to that?

We are still exactly where we said we were before.

If you look at how Citicorp is growing, the international consumer business has done well.

We also think the GTS business, with the book of business we are building, especially as interest rates change will start showing some of that through as well.

So when you put all of that together and really the change in the business models in our securities banking business, we think all of that still takes us back to a 1.25, 1.5 points on assets that we ought to be able to recognize on a longer-term basis.

And, of course, interest rate environments are also important in terms of where and how we get to that.

Higher rates is a function of your 1.25 to 1.50?

Well, I think we have said that that is the kind of business that should be able to earn 1.25 points, 1.5 points in much more of a normalized environment.

And normalized we were talking about is, of course, credit taken into account, but as credit changes that is one of the factors.

And got to say interest rates are another factor, too.

Super.

Thanks so much.

John McDonald, Sanford Bernstein.

Wanted to try to just ask Betsy's question on the capital just maybe a slightly different angle.

It's a question comes up a lot in investor conversations.

I guess what we struggle with is you are at the high end of peers on all the capital ratios and a number of -- most of the other big banks are talking about mid-year hopes of capital deployment.

So as we look at it we kind of ask the question to what degree is perhaps Citigroup just being conservative or is your implementation of the various Basels more complicated or less certain due to the international aspect of your businesses?

Could you help us get a little closer to reconciling that?

Let me take a crack at to that.

John will add to that as well.

I think the first part, I would say, is that for us or anybody else some of the definitional issues still have to be worked through.

A lot of the measurement issues are still -- they are going to have to be worked through.

We have said in the past and I will say again, we think 2011 is the year where a lot of those details get worked out.

That is an important part to it.

The second part of that is that we do want to manage our business in a prudent way, which is why we said we want to carry a cushion.

And putting all of those things into account, we think it's prudent to think about returning capital in 2012.

Okay.

And is there any light you could shed on whether the international aspect of the business changes the Basel implementation or is that just getting too deep?

No, there are no systematic issues other than those that are generic for everybody.

Okay, thank you, Vikram.

John, a quick question on the tangible book value impacts.

Could you just walk through how the AOCI and maybe the DTA, if it had an impact, affected the tangible book value this quarter?

You take a look at the other comprehensive income, the AOCI, as you say, two big drivers there.

One would be losses on the AFS securities.

That was about $1.3 billion, $1.4 billion of a negative.

And then we had a positive pickup on the FAS -- on the currency translation adjustment.

That was worth about $400 million going the other way.

Okay.

And then regarding regulatory capital ratios and DTA recapture, now that you are -- you have been profitable for a few quarters, what is needed to allow for the consumption of DTA to where your regulatory capital might grow faster than your net income at some point?

The single largest driver would be net income in our North America operations.

When you take a look at the breakdown of the DTA, we ended the quarter with DTA of about $52 billion.

$5 billion of that is state and local, $5 billion of that is international, so $42 billion is really US federal tax.

And the single largest driver there is generating more profits in North America.

Okay, so it's that geographic mix really.

Last thing is on reg reform question.

Do you have any initial thoughts on the potential changes in the methodology for calculating FDIC premiums, the so-called Tester's amendment?

I am sorry, do I have any what?

Have you done any calculations that you could share or any thoughts on how that change in the FDIC methodology might affect you in 2011 or 2012?

Well, the way the --- what we have said is that, at least from the impacts of Dodd-Frank that are measurable right now, the change in FDIC assessment is the single largest impact on us.

We don't have much of an impact on debit card interchange or overdraft fees.

Those are really small impacts on us.

But the way that the FDIC has proposed changing its formula will impact all the large banks dramatically -- have a greater dramatic impact on the large banks than it will on the small banks.

So our assessment right now is based upon the rules.

We are looking at almost a doubling of the FDIC assessment.

Okay.

Just from a 2010/2011 absolute dollars, doubling potentially?

Of course, it depends upon exactly when in 2011 it goes into effect.

Right.

And so depending upon if it's a second-quarter item then it would be three quarters.

You can do the math.

Okay, great.

One quick final item.

John, can you just tell us where the DTA ended up and how much of that was allowable?

I might have just missed it in the disclosure.

Yes, we ended with about $52 billion of DTA and $35 billion of that was disallowed in coming up with our Tier 1 common ratio.

Great.

Thank you.

Jeff Harte, Sandler O'Neill.

Bigger picture question; we look at all the data we are getting on the emerging markets and the international franchise and it seems loans are growing, revenues are growing, credit seems okay.

But there is a lot of things going on in the world from currencies to what is going on in Europe.

What are you -- can you give us any sense for what you are seeing kind of on the ground in some of the emerging markets as far as the kind of near-term continuation of growth prospects?

First of all, the emerging markets -- that is a broad group.

We know what is happening in certain areas.

You see it in South Africa; you see it in China which is the growth in inflation there.

And especially those countries that don't have a flexible currency are seeing more of that and there is growth adjustment there as a result of these changes.

But I would say that the underlying dynamics of the consumers in these markets and the growth models actually finding a real, a solid development model has not really changed.

And so we expect to see continued increase in loan demand.

We expect to see continued increase in capital markets activities.

We expect to see continued growth not only in the Asian markets, but also in the Latin American and some of the African markets.

Some of the Eastern European markets are still linked through Europe and that is a longer process.

But we remain constructive on the emerging markets, understanding that monetary tightening and other kind of breaks may have to be put on from time to time to manage the overheating that can occur and the inflation that occurs.

I think the real question still keeps coming back to the US economy, in our view, and what kind of growth you are going to see and what is going to happen to housing prices.

It is still the largest economy in the world and that is going to be something the markets are going to have to watch over the next two, three quarters.

And that is why I think when I started I said that the macro is still going to dominate the micro here for the next two, three quarters.

Can you just maybe specifically comment a little bit on Mexico?

That seems to be your biggest non-US market now.

Sure.

I think our -- first of all, you see our account activity is pretty strong in terms of our account opening.

Our loan growth continues there.

We have seen the linkage between Mexico and the US turn around the GDP and we still think that leverage is pretty powerful and so if the US economy starts doing better you are going to start to see that in Mexico as well.

Everybody knows the more macro social issues that are occurring there.

When you look at our mix of branches we happen to be in a lot of the major sort of areas, although we are everywhere, obviously, in Mexico, but we feel that given some of the social issues we are in the right places for capturing the right kind of population there.

And so I don't know if there was anything specific you had in mind, but we continue to be very constructive on our business in Mexico.

We are also expecting that business to continue to grow as a result of some of these fundamental turnarounds in the GDP numbers of the country.

Okay and then a little more detail.

The equity trading in the quarter, the press release cited derivatives activity and principal positions.

In an environment where equity markets were up so much in most areas I am a little surprised to see principle positions be one of the drivers of the decline.

Can you give us any more color on that?

No, I am not going to go into the individual strategies that that particular desk had employed, but as I said, it generated about $150 million of revenue in the third quarter and virtually zero in the fourth.

Okay, thank you.

Chris Kotowski, Oppenheimer.

I guess I would like to go back at that trading question a little bit.

You said take a longer view of it and fixed income went from $21 billion in full-year 2009 to $14 billion this year.

I am curious, is that kind of all geographies, all products or is it primarily the impact of the European peripheral country credits?

I wouldn't say that the European peripheral countries were a significant contributor to any of our trading results, so you can sort of take that one off the table.

Again, when you take a look at the trading performance, first quarter 2009 I think we all had the same thing.

A very, very strong quarter in the first quarter of 2009 and that one kind of -- that is going to be something that is going to be very difficult to replicate.

So -- and then each quarter sort of tends to tell its own story.

As I mentioned, this quarter our weaker trading was actually concentrated in the rates and currency business, particularly the G-10 rates business in fixed income.

But there is no indication that there is anything systemic in those numbers.

Okay.

Was there an impact just from long rates rising during the quarter?

Is that the primary impact?

It's primarily associated with our market-making activities as we were trying to facilitate client needs and if clients were reacting to rising rates, then we were certainly on the other side of that.

Let me put it the other way.

If you are trying to read any more systematic into it, there isn't.

These are strong businesses.

We've got very strong franchises in the local currency areas as you know.

We've got a very strong G-10 business.

We are building out our equity business.

So we actually remain very positive in terms of the amount and the size of our client flow.

Client activity continues to be robust.

You put it all together; again, this is a business that we continue to believe is going to be a big contributor going forward.

Okay.

And then on the $255 million net interest income adjustment, is that something that we should think of as a one-time reserve or is that an ongoing item or how long does it go on for?

Well, we have been -- again, the $255 million that you are talking about is the adjustment that we made to build additional reserves for potential client refunds in our CFJ business.

That is a reserve that we have adjusted periodically for four or five years now at this point in time.

So again, that just -- as we see changes in the market this particular quarter the build was really associated with what we thought might be an uptick in refund requests related to the Takefuji bankruptcy that occurred.

So it was really a response to a specific event.

Okay.

And then finally, your expense guidance I believe previously was $11.5 billion a quarter, give or take, and now we are at $12 billion to $12.5 billion.

Should we assume that that comes straight out of pre-provision earnings, or is that -- do we expect revenues to -- revenue increases to offset that to at least some degree?

Well, I just got to correct you just a little bit, Chris.

Going into 2010 our guidance was full year expenses of $48 billion to $50 billion.

By the second half of the year we said that we thought individual quarters for the second half of 2010 would be $11.5 billion to $12 billion.

So we really weren't at an $11.5 billion guidance.

And so as we look ahead to next year, again we are just trying to be consistent with where we were, quite frankly, at the beginning of last year, which was as we look at the overall year it's $48 billion to $50 billion of total expense.

We ended this year with $47.4 billion so it's not all that much different.

All right, fair enough.

That is all for me.

Moshe Orenbuch, Credit Suisse.

Could you talk a little bit maybe about how you think about once you do get to capital return how you think about the pacer or mix as it relates to things like the shrinkage in the balance sheet from Citi Holdings and the like?

Moshe, that is an important question.

The good news is we have got a few quarters to think about it because as we said before this is a 2012 thing.

And, of course, the usual discussions will apply on stock repurchases versus dividends and all that kind of stuff.

Sort of think we should pick up a little bit later.

Okay.

I just -- very quickly on the proprietary trading commentary before, that wasn't that you changed the focus of the business, that was the revenue output in the quarter right, John?

That is correct.

Great, thank you.

Ed Najarian, ISI Group.

Most of my questions have been answered but maybe just two quick ones.

Would you be willing to disclose some approximation of what your Basel III-based Tier 1 common ratio is today?

And then how would you advise us to think about the pace of shrink of Citi Holdings over the next 12 months?

Okay.

On the first one, no.

As I said, we are targeting to be at that 8% to 9% range in 2012.

As far as the second, look, if you take a look at the assets that are left in Citi Holdings, and we lay them out for you in the deck, we are not likely to maintain the same pace that we had in 2010.

Specifically, again brokerage and asset management, which has got roughly $26 billion, $27 billion of assets, that is virtually all tied up in the Morgan Stanley Smith Barney joint venture.

And so that is an event as opposed to something that we are just going to wind our way down over the next several quarters.

Special Asset Pool is about $80 billion of assets now.

We have taken that down dramatically.

But now roughly a third of the remaining Special Asset Pool assets are hold to maturity assets and so the pace of the reduction in the Special Asset Pool is also going to slow because we just don't have as much inventory, quite frankly, to push out.

And then you get to the last component, the local consumer lending, and more than half of the remaining assets are tied up in US mortgages.

I don't see a big one-time sale of US mortgages.

We will continue to sell down assets at a pace, but it's not likely that we are going to find a $20 billion to $30 billion sale on our doorstep in any sort of rational terms in the near term.

So the pace is going to slow from where we have been in 2010.

Okay, that is helpful.

And then, obviously as we get to the end of this quarter you get some sense from the regulators, we think, of or in terms of what your discussions with the regulators are and what they come back to you with in terms of your capital planning.

Do you expect to give us more detail on capital planning and on your Basel III-based Tier 1 common ratio when you report first-quarter earnings and we will be in April at that time?

No, that is kind of unlikely.

Unless we significantly change our position as to our view towards 2012 being the year that we would be looking to return capital, it's not likely that we would be changing anything else.

Okay, thank you.

Mike Mayo, CLSA.

In November Citi gave a presentation where you guys said you will increase investment spending for consumer by $3 billion to $4 billion over the next three years.

Can you give us some more color when we should see that hit and how much it hit this quarter?

I know you said $150 million of the linked quarter increase was due to increased investments and volume-related matters, so I am guessing it hasn't really hit yet.

And how much of your expense guidance for the year includes some of this additional investment spending?

The $3 billion to $4 billion still holds.

We actually have been or have begun that investment spending.

I think we mentioned the fact that as early as the first quarter of this year -- of 2010 we had some elements of it in place, although it certainly picked up pace as we got later into the year.

When you look at the fourth quarter, Mike, I mentioned $150 million being the linked quarter-on-quarter impact of investment spending.

It's safe to say that something on the order of $300 million to $400 million of our expensive base in the fourth-quarter represented investment spending.

So we should see that increase by another $2.6 billion over the next three years?

Well, $3 billion would be -- $3 billion to $4 billion would be the total amount of spending.

So you are at a run rate now of, what, $1.2 billion?

That is about it.

Okay, so you have another $2 billion more for this investment spending, is that fair to say?

Well, if you are at a run rate of $1.2 billion for a quarter, that would -- for a year I should say, that would mean that over something like three years then you would be within that $3 billion to $4 billion range, right?

Okay, so this is just a one-time step-up then you maintain that higher level?

Exactly.

Okay.

And then separately, it came out last week that you have an MOU with the regulators.

Is this -- how big a deal is this in your mind?

Is this simply backwards looking for some of the problems from a couple years ago or is this still something you need to wrestle with?

You highlighted some risk management issues that you still had to resolve.

You know, Mike, as you probably know, we can't comment on any conversations that we have with our regulators.

Okay.

And then the separate question would be for the DTAs you earned $10 billion last year in GAAP earnings but the DTA level still went up to $52 billion as you pointed out.

In layman's terms, why does the DTA keep going up, even while you have positive GAAP earnings?

I know you mentioned some of that is geography.

What are some of the other reasons why it still goes up?

Well, the biggest impact for us was the adoption of 166 and 167 in the first quarter.

That added $4.3 billion, $4.4 billion to the DTA asset.

Okay, but it's still is leaking upward here even on the past couple quarters.

Well, don't forget then also besides earnings you have got the impact of the AFS portfolio.

We had losses on the AFS portfolio this quarter.

I mentioned that in response to another question.

When you think about driving down the DTA, the single -- the key component for us is actually to reduce the amount of the DTA that is represented by net operating loss carry forwards.

And we have actually taken that down during the year.

We started the year with I think just a little bit north of $5 billion of NOL carryforward and we will end the year with about $2.3 billion, maybe $2.2 billion of NOL carryforward.

And so once we work our way through that and actually in the Q I believe, the third-quarter Q, we actually gave you the disclosure that our expectation is that we will be through the NOL carryforward during 2011.

Once we work our way through that then it will become easier to deal with the foreign tax credit carryforwards, which are the largest piece of our DTA.

Then last question for Vikram.

You led off the conference call saying macro trends should dominate micro trends the next couple quarters.

I was just curious why you mentioned the next couple quarters in particular.

Well, look, I think we are all -- as I said, the next few quarters -- now it could be a couple quarters.

But let me say that, again, we have got to watch what happens in the US.

That is still the biggest economy; we see a lot of constructive signs.

Credit seems to be getting better as well, but we want to see employment rise.

We want to see GDP grow correctly.

These are all going to be important things.

If at some point the economy feels like whatever the rate it is at it's more stable and recovering and is on a trajectory that takes down a little bit of the uncertainty in the marketplace.

Of course, I am also hoping that the next two, three quarters shed some more light on some of the leverage-related issues in Europe as well.

And so it just feels to us that when you look at the world and the growth in the emerging markets and we you look at kind of what is going on in Europe and the US that these next few quarters are going to be really important.

Now that is not a prediction, that is just a perspective.

All right, thank you.

Carole Berger, Soleil Securities.

Thanks for taking the call.

My question is really on foreign exchange.

You mentioned in a couple of places how expenses were impacted by exchange rates, but you didn't mention anywhere where revenues were similarly impacted.

Are there places where you are not appropriately matched in terms of where your revenues and expenses are coming from?

I didn't catch the last question.

Are we appropriately masked?

Matched.

Matched.

Oh, I am sorry, I am sorry.

The impact on revenues and expenses has got less to do with matching assets and liabilities.

The assets and liabilities --

No, I meant in terms of -- you mentioned a couple of places where expenses were up because of the exchange rate.

And my question is why aren't revenues also up because of --

Yes, I think in some of the commentary that we gave you on the international regional consumer banking franchises we mentioned that FX changes drove some of the revenue increase.

The revenue was up about 4% and FX probably drove more than half of that.

But when you take a look at all of our businesses, we operate in many different currencies around the world, and so FX overall has really got a very small impact on our bottom line and it tends to work its way out as far as revenues, expense, and NCLs.

But when you get into individual lines FX can be a driver of variance just in those individual lines.

Okay.

My second question was is there any reason -- you said that 19% of your assets remained in holding.

Is there any reason to believe that a greater proportion of those assets are risk-weighted?

In other words, are more than 19% of your risk-weighted assets in holding?

Yes, and Carol, as a matter of fact, what we have done in the past -- we indicated at the end of June that the risk-weighted assets in Citi Holdings represented about 40% of our risk-weighted assets at that point in time.

We then in September told you that Citi Holdings' risk-weighted assets were down to 37% of our total risk-weighted assets.

And by the end of the year our current estimate is that the Citi Holdings risk-weighted assets will be about a 34% of our total risk-weighted assets.

So think in terms of Citi Holdings representing 19% of our GAAP assets and roughly estimated 34% of our risk-weighted assets.

Thank you.

Richard Bove, Rochdale Securities.

Thank you for spending so much time on this call with us.

Not a problem.

I would like to ask you the same question I asked JPMorgan but in the opposite direction.

They have got a negative federal funds plus cash position when divided by assets.

You now have roughly 12.9% of your balance sheet on the asset side in cash plus positive net funds position.

Why is it so big?

You are only getting about a 79 basis point return on that money, which must be having an impact on your net interest margin.

Could you kind of give me your thinking on this?

Well, you are right; we do have a lot of cash on the balance sheet.

In response to one of the earlier questions we touched on the fact that there has actually been a decline in our available-for-sale securities during the quarter as we have begun to reposition that portfolio given the current rate environment.

So a little bit of the incremental cash that we have on the books right now is really being driven just because we are in the midst of repositioning that AFS portfolio.

But if we go back in time that percentage should be somewhere around 3% or 4% and it would be because, generally speaking, Citigroup always had a net negative federal funds position.

It's almost shocking to see it with a $57 billion net positive federal funds position and cash has never been this high as a percentage of assets.

So one might argue, on a ratio basis you are three times higher as a percentage of assets than you would normally be so just selling off some securities last quarter had no real impact on what I am talking about.

Well, as we entered 2010 we commented on the fact that we were deliberately liquid at that point in time and we felt that it was prudent to remain liquid throughout 2010.

That gives us a certain amount of flexibility for two things.

One, clearly as our debt now begins to mature, and we do have debt -- sizable amounts of our long-term debt maturing during 2011 -- we will have less of a need to roll over that debt.

So one of the things you will see is our long-term debt begin to go down.

That will consume some of that cash.

The second is we are open for business and we are looking for -- we are looking to build a loan book both in our consumer and our corporate businesses.

And so our expectation is that we will begin to put some of that liquidity to work in 2011.

So it's fair to state that if you start to utilize that excess cash to lend and if your loan-to-deposit ratio starts to move up, I am going to say again, to more normal levels that this represents tremendous excess earnings capacity at the moment?

Yes, our deposit-to-loan ratio, I tend to think of it the other way right now, is about 139% or 140%.

That is higher than we would expect to be on a long-term basis.

Okay, thank you.

Andrea Jao, Cowen & Company.

Good morning.

Two quick questions.

First on trading equities and -- on the fixed income and equities trading businesses, have there been changes in your appetite for taking risk or committing capital actually facilitate customer transactions?

Then I have a follow-up regarding the balance sheet.

No.

No, there has been no change in our appetite.

Okay.

Now how should think about the balance sheet by the end of 2011?

Just thinking back to the previous question by Dick, excess liquidity will be replaced by higher loans and less borrowings.

How about deposits in your securities book?

You are breaking up pretty badly there, Andrea, but I think you asked about deposits.

We -- right now, again given where we are from a liquidity point of view, we obviously will be there for our customers to accept deposits, but one of the things that we are focused on right now is addressing, I am going to call it, the quality and the pricing of our deposits.

So we are deliberately shifting out of pricing to capture time deposits and I think you have seen some of the beginnings of that in some of the shifts in our interest-bearing deposits, both in the US and in our branches outside the US.

That is reflected on the face of the balance sheet right now.

So we will look to maintain steady deposits but try to improve the mix.

Got you.

Thank you so much.

There are no further questions at this time.

I would like to turn the conference back to Mr.

John Andrews.

Thank you, everyone, for committing so much time this morning on a rather lengthy call.

Obviously this will be available for replay on the website later this afternoon.

And if you have follow-up questions, contact the IR team here at Citi.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.