花旗銀行 (C) 2011 Q1 法說會逐字稿

Hello and welcome to Citi's first-quarter 2011 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 Q&A session.

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

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

Mr.

Andrews, you may begin.

Great.

Thank you, Celeste.

Good morning and thank you all for joining us today.

On the call our CEO, Vikram Pandit, will speak first; then John Gerspach, the CFO, will take you through the earnings presentation, which is available for download on our website, Citigroup.com.

Afterwards we will be happy to take your questions.

Before we get started I would like to remind you that today's presentation may contain 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 2010 Form 10-K.

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

John, thank you, and good morning, everyone.

Thank you very much for joining us today.

As you know, last year was our first year of profitability since the financial crisis, and we continue to make progress in 2011.

We earned $3 billion this quarter, more than double what we earned last quarter.

Revenues were up 7% and expenses were down 1%.

The environment has been challenging.

Low interest rates are compressing spreads, and we continue to carry large amounts of liquidity.

But we believe this is a cyclical, not a secular, issue.

Our core businesses performed well despite the environment, with Citicorp earning $4.1 billion for the quarter.

In Citicorp, consumer and corporate loans grew on a combined basis by 10% year-over-year.

Pretax earnings in Citicorp were almost evenly split between the emerging and developed markets, reflecting our deep roots in the 160 countries where we do business.

On the Institutional side our Client business in Securities and Banking was strong.

Although down from one year ago, revenues in Lending, Equities, and Fixed Income rebounded strongly from the previous quarter.

Client activity in our global Transaction Services was also strong.

We had higher transaction volumes, deposits, trade finance loans, and we have a strong pipeline going forward.

In both US and International Consumer Banking, net income was up from the last quarter and the first quarter of 2010.

Net credit losses declined 31% from the first quarter last year.

Internationally, average deposits and loans increased 13% and 14%, respectively, from a year ago; and credit trends continue to improve.

Throughout our franchise we are focused on adding high-performance assets, and we remain very selective about the assets we put on our books.

We continue to divest non-core assets in Citi Holdings.

With a $22 billion decrease in the first quarter, total assets in Holdings stand at $337 billion, down from 33% from one year ago.

Citi Holdings assets are now at about 17% of our total balance sheet, and losses in Citi Holdings -- this quarter the loss was $608 million, down from 31% from the prior year.

These results helped improve our financial strength.

Our Tier 1 Common ratio increased to 11.3% and our tangible book value increased to $4.69 per share, up $0.24 per share from last quarter and up 15% from a year ago.

We are also building for the future.

We are making substantial investments in our businesses in Citicorp.

In the first quarter, investments exceeded $500 million including technology, branches, marketing, and new corporate and investment banking hires.

In addition, we are building our commercial banking business.

Lastly, we announced a 1-for-10 reverse stock split to be effective on the morning of May 9.

We also announced our intention to reinstate a dividend of $0.01 per share in the second quarter.

These are meaningful steps as we anticipate returning capital to our shareholders next year.

We will continue to execute our strategy with discipline, reduce assets in Holdings, and invest in key markets and our core businesses.

I believe that we have demonstrated that we are consistently profitable and we are now focused on responsible growth.

Let me turn it over to John Gerspach, and we will come back and answer questions at the end.

Thank you, Vikram, and good morning, everyone.

Starting on slight 2, Citigroup reported first-quarter net income of $3 billion or $0.10 per diluted share versus $0.15 in the first quarter of 2010.

This quarter's results included a $709 million net pretax loss on the transfer of certain securities in the Special Asset Pool from held-to-maturity to trading assets, which I will discuss later.

We also saw negative CVA of $256 million from Citi's spreads tightening, compared to a positive $308 million last year.

Revenues of $19.7 billion were down 22% versus the first quarter of 2010 due primarily to lower Securities and Banking revenues, declining assets in Citi Holdings, and the loss on the asset transfer.

Expenses were up 7% year-over-year to $12.3 billion driven by higher investment spending, volume-related costs, the impact of foreign exchange, and higher legal and related costs, all of which were partially offset by continued productivity savings and declining expenses in Citi Holdings.

Net credit losses declined for the seventh consecutive quarter to $6.3 billion, 25% lower than the first quarter of 2010.

We also released $3.3 billion of net loan loss reserves compared to a $53 million net release last year.

Turning now to Citicorp and Citi Holdings on slide 3.

Citicorp reported revenues of $16.5 billion and net income of roughly $4 billion in the first quarter.

Results were lower than the first quarter of 2010, which benefited from a stronger trading environment.

We continued to show progress in growing Citicorp with loans up 10% year-over-year, including 6% growth in consumer and 16% growth in corporate loans.

Citi Holdings reported revenues of $3.3 billion and a net loss of $608 million.

Citi Holdings ended the quarter with $337 billion of assets, down $22 billion during the quarter and down $166 billion year-over-year.

Now on slide 4 we show a 9-quarter trend for Citicorp's results.

Excluding CVA, Citicorp's revenues were $16.7 billion, down 8% versus the prior year and up 9% sequentially, driven by higher fixed income and equity markets revenues versus the fourth quarter.

Operating expenses of $9.6 billion were up 12% versus the prior year.

More than half of the increase was due to higher investment spending.

The remainder was roughly split between the impact of foreign exchange and inflation and higher legal and related costs.

Higher volume driven expenses were offset by continued productivity savings.

Citicorp's net credit losses were $2.3 billion, down 26% from the prior year, driven by Citi-branded cards in North America.

We released $1.3 billion in net loan loss reserves, up from $367 million last year, mostly due to higher net releases in Citi-branded cards and the Corporate portfolio.

Excluding CVA, earnings before taxes of $6 billion declined 12% year-over-year and were up over 50% from the prior quarter.

Citicorp continued to benefit from a strong emerging-markets franchise in the first quarter as shown on slide 5.

Excluding CVA, emerging markets contributed 44% of Citicorp's revenues and over 50% of earnings before taxes in the first quarter.

We have generated year-over-year growth in emerging markets revenues for 4 consecutive quarters, driven by both our Consumer and Institutional businesses.

This growth reflects consistent strength in underlying business drivers, with average deposits up 8% year-over-year and loans up 20%.

While expenses have grown as we ramped up investments in these regions, we have also benefited from credit improvement as emerging markets recovered earlier than developed markets.

As a result, while increasing our investments, we also maintained year-over-year earnings growth in emerging markets in each quarter of 2010 and the first quarter of 2011.

Slide 6 shows results for our North America Consumer Banking business.

Revenues of $3.3 billion were down 12% versus last year mainly due to a decline in average loans and the impact of CARD Act.

Expenses were up 4% year-over-year to $1.7 billion as we continued to invest, largely through higher marketing and technology spending.

Credit costs declined 63% from last year to $797 million.

Net credit losses were down 33% to $1.4 billion, driven by Citi-branded cards.

The reserve release was $649 million this quarter.

Net credit margin grew by 15% year-over-year to $1.9 billion.

Sequentially, total accounts remained stable in the first quarter of 2011, while card purchase sales reflected a seasonal decline versus the fourth quarter.

On a year-over-year basis, card purchase sales were up slightly on a smaller account base, reflecting 4% growth in sales per account.

Turning to our International Consumer Banking businesses on slide 7, International revenues were $4.6 billion in the first quarter, up 8% year-over-year, driven by growth in Asia and Latin America.

Revenue growth reflects both an improvement in underlying drivers as well as a benefit from foreign exchange, partially offset by spread compression.

We also had a $70 million charge to revenues for the anticipated repurchase of certain securities sold in Asia.

Year-over-year, average deposits and loans grew by 13% and 14%, respectively.

Investment sales were up 5% versus last year and card purchases grew 20%.

Expenses were $2.8 billion in the first quarter, up 18% versus last year, with roughly a third of the increase due to the impact of foreign exchange and inflation.

The remainder primarily reflects higher investment spending and volume-related costs, partially offset by continued productivity savings.

Credit costs of $493 million were down 33% versus last year, driven by a decline in net credit losses.

Higher revenues and lower net credit losses resulted in net credit margin expansion again in the first quarter, up 16% year-over-year to $3.9 billion.

On slide 8, we show revenue growth trends for International Consumer Banking in more detail.

Sequentially, we have grown average loans and deposits every quarter for 2 years; and we saw progress again this quarter in card purchase sales and investment sales.

These trends reflect the economic environment in these regions as well as the results of our investment spending.

With growing revenues and improving credit costs, we have increased our net credit margin year-over-year for 6 consecutive quarters.

Slide 9 shows our Securities and Banking business.

Excluding CVA, revenues of $6.2 billion were down 19% from the first quarter of last year, driven primarily by Fixed Income Markets.

In Investment Banking, revenues were down $206 million to $851 million, primarily driven by lower debt underwriting.

Ex-CVA, Equity Market revenues were down 9% versus last year to $1.1 billion.

Cash equity revenues and client volumes grew year-over-year but were more than offset by lower trading revenues on principal positions.

Fixed Income Markets revenues, ex-CVA, were down 22% year-over-year to $4 billion.

While client volumes remained strong, trading revenues on market-making activities were lower versus 2010, reflecting in part tighter bid-offer spreads across most trading products as additional liquidity entered the market since last year.

On a sequential basis, total Markets revenues for Equities and Fixed Income were up 64% in the first quarter driven by higher volumes across most products and a more favorable trading environment versus the fourth quarter.

Lending revenues were $244 million, flat versus last year.

Private Bank revenues excluding CVA were up 5% year-over-year to $520 million.

Total operating expenses of $3.8 billion were up 11% from last year.

Roughly half of the increase was due to the absence of a litigation reserve release in the first quarter of 2010.

The remainder mostly reflects investment spending and higher volume-related costs, partially offset by productivity savings.

Credit costs were a benefit again in the first quarter as net credit losses were more than offset by net reserve releases in the Corporate portfolio.

Moving to Transaction Services on slide 10, revenues of $2.6 billion were up 5% from the first quarter of last year driven by growth in Asia and Latin America.

Treasury and Trade Solutions was up 3% on higher trade revenues and increased deposits, partially offset by spread compression.

Securities and Fund Services grew 9% year-over-year driven by higher volumes.

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

Asset growth was driven by Trade Finance, with average trade assets up over 80% from last year.

Average deposits grew 11% to $355 billion, and assets under custody were up 10% to $13 trillion.

Expenses of $1.3 billion were up 14% versus last year, reflecting higher volumes and continued investment to grow the business, partially offset by productivity savings.

Slide 11 shows Citi Holdings' assets.

We ended the quarter with $337 billion in Citi Holdings, or 17% of total Citigroup assets.

The $22 billion reduction in the first quarter was comprised of over $7 billion of asset sales and business dispositions; approximately $13 billion of net runoff and paydowns; and $1.3 billion of net cost of credit and net asset marks.

On slide 12 we provide more details on the transfer of nearly $13 billion of assets in the Special Asset Pool from held-to-maturity to trading.

The majority of these securities had originally been classified as available-for-sale, and they were transferred to held-to-maturity in the fourth quarter of 2008.

We have moved the securities to trading assets, allowing us to sell them as a mitigating action in anticipation of adopting Basel III.

These $13 billion of securities would have had a disproportionately higher Basel III risk weighting compared to the remainder of the Citi Holdings assets.

The transfer resulted in a net $709 million pretax charge to revenues, resulting from the recognition of $1.7 billion in net pretax losses, which were previously reflected in OCI, partially offset by $946 million of mark-to-market and realized gains.

OCI increased by $1 billion, representing the reversal of net unrealized losses after tax.

To date, we have sold nearly 75% of these assets at prices generally at or above our marks.

On slide 13 we show a 9-quarter trend for Citi Holdings' results.

We narrowed the loss in Citi Holdings again this quarter to $608 million.

Revenues were down 50% year-over-year to $3.3 billion due to declining assets, lower positive marks in the Special Asset Pool, and the loss on the asset transfer this quarter.

Expenses of $2 billion were down 22% versus last year, and total credit costs were down 64% to $2.1 billion.

Looking at Citi Holdings in more detail on slide 14, revenues in Brokerage and Asset Management were $137 million this quarter, down from the first quarter of 2010 which included gains on the sale of Habitat and Colfondos.

In Local Consumer Lending, revenues were down 32% versus last year to $3.2 billion, driven by declining loan balances, a higher mortgage repurchase reserve build, and a higher refund reserve build related to our consumer finance business in Japan.

In the Special Asset Pool, revenues were negative $7 million in the first quarter, down significantly from last year due to lower positive revenue marks and the $709 million loss on the asset transfer.

Credit costs were down 64% year-over-year to $2.1 billion as credit cost continued to improve in both the Consumer and Corporate portfolios.

Total net credit losses were down 25% to $4 billion as lower Consumer net credit losses were partially offset by higher Corporate losses.

Credit losses in the Special Asset Pool more than doubled year-over-year to $670 million, reflecting higher cost of loan sales and higher net credit losses on loans for which we had previously established specific FAS 114 reserves, which were then released during the quarter.

We released $2.1 billion of net loan loss reserves in Citi Holdings in the first quarter, nearly half of which was attributable to the corporate portfolio.

Local Consumer Lending continues to drive the earnings performance of Citi Holdings, with nearly $600 million of net loss for the quarter.

Within Local Consumer Lending, the net loss was mostly attributable to the mortgage portfolio.

Slide 15 shows the results for the Corporate/Other segment.

Revenues declined by $410 million versus last year, reflecting lower investment yields and net losses on hedging activities.

Net income also reflects higher operating expenses during the quarter.

Expenses were up by $356 million versus last year, mainly due to legal and related costs.

Assets of $281 billion include approximately $80 billion of cash and cash equivalents and $146 billion of liquid available-for-sale securities.

Slide 16 shows total Citigroup net credit losses and loan loss reserves.

NCLs continued to improve in the first quarter, down 9% sequentially to $6.3 billion.

The net LLR release grew nearly 50% to $3.3 billion.

We ended the quarter with $36.6 billion of total loan loss reserves, and our LLR ratio was 5.8%.

Consumer NCLs declined 12% sequentially to $5.4 billion.

We released $2 billion in net loan loss reserves.

Corporate credit was a benefit of $520 million in the first quarter compared to $256 million last quarter.

Corporate net credit losses grew 28% sequentially to $849 million driven by chargeoffs for loans for which we had previously established specific reserves, which were then released during the quarter.

We released $1.4 billion of net corporate loan loss reserves in the first quarter, up from $920 million in the fourth quarter.

Corporate non-accrual loans of $5.5 billion were down 36% versus the prior quarter, the majority of which was attributable to EMI.

Moving to Consumer credit trends on slide 17, as I mentioned, consumer net credit losses of $5.4 billion were down 12% sequentially due primarily to North America cards.

Our net credit loss ratio declined again this quarter to 4.9%, and our loan loss reserve ratio was 7.5%.

Slide 18 shows our International Consumer credit trends.

In Citicorp, NCLs continued to improve on both a dollar and a rate basis in the first quarter, while dollar delinquencies grew in some markets as we continued to grow our international loans.

In Asia, India continued to show the most significant improvement in net credit losses; for the region, 90-plus-day delinquencies were flat, but down as a percentage of loans.

In Latin America, net credit losses continued to improve, driven by Mexico cards.

Our 90-plus-day delinquencies improved on a rate basis.

On slide 19, we show Citi-branded cards in Citicorp and Retail Partner Cards in Citi Holdings.

Credit trends for both portfolios continued to improve.

In Citi-branded cards, NCLs declined for the fourth consecutive quarter.

NCLs decreased by 19% sequentially to $1.4 billion, and 90-plus-day delinquencies were down 10% to $1.4 billion.

In Retail Partner Cards, NCLs were down for the seventh consecutive quarter.

NCLs decreased by 18% sequentially to $1.1 billion, and 90-plus-day delinquencies declined by 19% to $1.3 billion.

For both portfolios, early-stage delinquencies also showed improvement on both a dollar and a rate basis.

On slide 20, we show the North America mortgage portfolio in Citi Holdings, split between residential first mortgages and home equity loans.

90-plus-day delinquencies in both portfolios improved again this quarter.

In residential first mortgages, we ended the quarter with $76 billion of loans, down 21% from a year ago.

Sequentially, 90-plus-day delinquencies declined by 18% to $4.5 billion and were down more than 50% from last year.

Net credit losses increased slightly from the fourth quarter due to lower recoveries, but were down 26% versus a year ago.

The sequential decline in first mortgage delinquencies was mostly due to asset sales and trial mods converting to permanent modifications.

During the first quarter, we sold $1.1 billion in delinquent mortgages.

Over the past 8 quarters, we have converted $5.3 billion of trial mods to permanent modifications.

More than three-quarters of these trial modifications were HAMP, and we continue to experience re-default rates on HAMP-modified loans of less than 15%.

The remainder were modified under other Citi programs; and to date the re-default rate on these modifications has been less than 25%.

In North America real estate lending in Citi Holdings, our total loan loss reserves represent 2 years of coincident NCL coverage.

Slide 21 shows the trend in our key capital metrics.

We ended the quarter with a Tier 1 Capital ratio of 13.3% and a Tier 1 Common ratio of 11.3%.

Our GAAP assets declined 3% year-over-year, while we reduced our risk weighted assets by 7% to $990 billion.

Citi Holdings represents roughly 31% of our total risk weighted assets.

So in summary, the first quarter showed continued execution of our strategy.

While Securities and Banking face a less favorable environment as compared to the first quarter of 2010, our markets business grew significantly from the fourth quarter, with robust client activity across Fixed Income and Equities.

Year-over-year we generated strong growth in both International Consumer Banking and Transaction Services.

Importantly, we accomplished these results in a challenging environment, as low interest rates continued to compress spreads.

We continued to invest in Citicorp, and we are seeing results across our major business drivers including loans, deposits, transaction volumes, and card purchase sales.

In Citi Holdings, we ended the quarter with $337 billion of assets, representing 17% of total Citigroup.

Assets were down by a third from a year ago, and Citi Holdings expenses declined by 22%.

Credit remained a significant contributor to earnings in the first quarter as net credit losses continued to decline, particularly in North America cards.

During the quarter we grew our tangible value per share by $0.24 to $4.69 per share; and our Tier 1 Common ratio grew over 50 basis points to 11.3%.

We also have over $36 billion of loan loss reserves.

Based upon what we know today, we remain confident that we are on track to operate in the 8% to 9% Tier 1 Common range under Basel III in 2012.

And, assuming we have clarity on capital rules, we still expect to be in a position to begin returning capital to shareholders next year.

Now I would like to discuss some factors that may affect our results for the remainder of 2011.

In North America Consumer Banking, we continue to expect net credit margin to be primarily driven by improvement in net credit losses.

As credit continues to improve, we will further increase our investments in the business.

In International Consumer Banking, 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 begin to increase in 2011, reflecting a growing loan portfolio.

In Local Consumer Lending in Citi Holdings, revenue should continue to decline given a shrinking loan balance resulting from paydowns and continued asset sales.

However, as we have seen in the first quarter, the pace of decline in Citi Holdings assets has moderated.

Regarding expenses, we continue to expect full-year Citigroup expenses of $48 billion to $50 billion this year, with some variability across quarters as we continue investing in Citicorp while rationalizing Citi Holdings.

Certain expenses, particularly legal costs and the impact of foreign exchange, will remain difficult to predict.

Now, that concludes our review of the quarter.

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

(Operator Instructions) John McDonald, Sanford Bernstein.

Yes, hi.

Good morning.

John, just a question to follow up on the expense outlook that you just gave.

Just to be clear, the FX and legal costs are difficult to predict; but those are included in your outlook of the $48 billion to $50 billion?

They are included in the $48 billion to $50 billion, based upon what we have seen to date.

But, John, I can't predict where the dollar is going to trade against all the different local currencies for the remainder of the year.

So again --

Sure.

-- if the dollar continues to decline we may have to be outside that range.

Okay.

In terms of regulatory costs, the higher FDIC expenses, is that baked into the guidance as well?

Well, we account for FDIC assessments as a contra revenue.

So that would not be part of our expense guidance, but that would be baked into what you would think about for revenue performance for the balance of the year.

Now, if I can anticipate your next question, based upon the way we understand the assessments will be working, we anticipate that the additional FDIC tax on us would amount to an annual increase of about $550 million.

And we will start reflecting that in our results in the second quarter.

Okay.

A question on Corporate/Other.

Just wondering longer-term, do you think Corporate/Other will always be a net cost center?

Or when you are not carrying as much liquidity and legal expenses should that have a modest positive contribution over time?

Or too difficult to predict?

I think that's a little difficult to predict.

We tend to hold some expenses in Corporate/Other.

Some of the more significant legal expenses, as we lay out for you when we have them.

From a revenue point of view, Corporate/Other -- it varies.

Our hedging activities over time, at least over the last several quarters, have tended to be somewhat on the negative.

We carry some macro hedges in Corporate/Other trying to address some fat-tail risks in some of our businesses, particularly Consumer business.

So it is more likely to be negative.

But the size of the negative pretax income should vary.

Okay, and one just last follow-up on that.

Just in terms of an expense rump from Holdings, is there a piece of unallocated expenses at Holdings that would come back to Citicorp after Holdings has wound down?

Is there any way to help us think about sizing that?

Well, we are actually very focused on what we would call stranded costs in Citi Holdings.

So as we wind down Citi Holdings we are trying to eliminate all the costs in Citi Holdings and so that we end up with zero stranded costs.

So I think we have demonstrated a pretty good discipline doing that.

You can pretty much track the decline in Citi Holdings' expenses against their decline in assets.

If you pull apart the decline in assets in the Special Asset Pool and Brokerage and Asset Management, our expenses as a percentage of assets in each of those businesses has held pretty steadily during the last 6 or so quarters.

We had a slight uptick in expenses in Local Consumer Lending against the assets; and that is mostly reflective of additional expenses that we'd be incurring in our mortgage business related to foreclosure activities, modifications, etc.

Okay.

But your goal is to not have any stranded costs once Holdings is completely wound down, and that feels a reasonable goal to you?

That is the goal.

Okay.

Thank you.

Glenn Schorr, Nomura.

Hi, John.

Thanks.

So first one is just conceptual.

On slide 21 you show that total risk weighted assets went up.

I love the non-US growth in loans; but all-in you had a little bit of shrinkage in loans.

You shrunk Holdings as well.

Is it fair to assume that the increase in risk weighted assets is some form of ratings creep?

No, it is not really ratings creep.

If you go to the -- if you just take a look at overall, our GAAP assets did grow from the fourth quarter to the first quarter.

We also -- so if you take a look at Brokerage receivables, that was one of the accounts that sort of grew.

So it really just reflects just the overall growth in the GAAP balance sheet.

Okay.

I appreciate the comments on operating and getting towards the 8% to 9% in 2012.

Would you be able to tell us where you're at in a Basel III equivalent today?

Because my guesstimation is somewhere around the 6% level, which is doable.

Means that you would have to grow maybe 30 basis points from here to there per quarter, which seems about right.

Yes, you know, Glenn, all I am going to say is that we -- as I've said in the prepared comments, we remain on track to be in that 8% to 9% range for Basel III next year.

Okay.

In the appendix on slide 35 you could look at what was transferred out and sold; and it looks like mostly Alt-A and prime mortgages.

If that is correct, I am just curious on what you are thinking in terms of housing in general.

You have less mortgage exposure than some other big banks, but you got some, and you seem to be selling down those positions.

Is that more risk weighted asset commentary and mitigation?

Or is it just as much a view of the markets in general?

Well, I want to make sure I answer your question, so if I stumble a little bit, Glenn, get me back on track.

No worries.

Specific to the transfer in SAP, those obviously are assets that we -- since they are in Holdings, those are not core to us.

We are looking to get rid of those assets.

We had them in originally in hold-to-maturity.

The decision we reached on that transfer was solely Basel III-related, just trying to -- again as part of our staying on track to get to that 8% to 9% range for next year.

These are assets, this $12.7 billion, these are assets that just had a disproportionately high risk weighting under Basel III.

So we took the opportunity this quarter to move them to a portfolio where we could get them off our books.

So that is what is going on with the Holdings.

Regarding our other mortgages in Citi Holdings in the real estate book, we continue to actively manage that.

As I said we have been active sellers of those mortgages over the last 5 quarters.

The last 5 quarters we have had something like $10 billion of sales out of the mortgage book.

Roughly $6 billion -- I think it was a little bit slightly over $6 billion of that $10 billion was on delinquent loans.

We continue to think that the best way to manage the severity risk that you have in that business is by selling delinquent mortgages.

So we are still active sellers of mortgages in that business.

Okay.

Maybe one -- thank you for that.

One last question on the NIM; it came in 6 basis points.

My gut is there is a bunch of obviously puts and takes.

But as you have some of the Holdings wind down and some of the higher-yielding stuff run off, I would think that is a natural effort or a natural runoff.

However, at some other banks you are seeing some mortgage extension help support the NIM.

Just curious on what your efforts are behind the scene, if it is on your mind that you need to support that.

Or do you let it drift lower and actually the benefit is the derisking of the portfolio?

I am going to probably disappoint a whole bunch of NIM-ites out there, but NIM -- I don't wake up in the morning and actively worry about what is going on with my NIM specifically.

We are really trying to -- don't forget.

NIM, when it comes to our trading books, NIM in a trading portfolio can be plus and minus.

So it kind of varies all over the place.

What we are focused on is executing the strategy that we put in place back in the beginning of 2008.

And that is really managing the Holdings assets down.

You are right; as those assets run off that is going to put some pressure on our NIM because those are some higher earning assets.

At the same point in time, I think now what you are seeing is you are seeing some good growth in the assets in Citicorp.

We mentioned the fact that Citicorp loans grew 10% year-over-year.

We continue to see good growth coming out of our International, Regional Consumer Banking businesses.

Latin American loans were up 17% year-over-year.

Loans in Asia were up 16% year-over-year.

The spread that we get on those loans will gradually help to mitigate the NIM pressure that we are getting from winding down Citi Holdings.

Excellent.

Thanks very much, John.

Guy Moszkowski, Bank of America.

Just to follow up on the NIM question for a second.

I don't want to beat the horse to death; I appreciate that you don't wake up in the morning thinking about this.

But last quarter you gave us a near-term outlook, and you came in just about exactly in line with that near-term outlook this quarter.

So I guess I should ask the question again.

Over the next quarter or two, what should we expect in terms of the directionality there?

Yes, I think that we are going to have some pressure on NIM in the second quarter.

The additional FDIC assessment that I mentioned in response to one of the earlier questions, we do account for that in our revenues.

That does impact our NIM.

So that will give us some downward impact.

And we are still -- we still have spreads that are under pressure.

So it is not -- my expectation would be maybe similar to this quarter as far as downward pressure.

Okay, in terms of the downward pressure?

So just sort of a continuation of that trend.

And just to go back to the Citi Holdings expense (multiple speakers)

I do think about NIM every day.

I just don't wake up thinking about it.

Fair enough.

Just to go back to the discussion of the Citi Holdings expense, it seems like a fairly chunky step-function decline from the fourth quarter, notwithstanding a little bit of noise in the fourth quarter there to the $2 billion run rate.

Should we think of $2 billion as a run rate for the next few quarters before another step function?

Or are you really going to try to manage it more downward gradually in line with the asset decline?

It really -- as I said, the chunkiness will come as we do perhaps some of the larger property sales.

I mean to the extent that we could sell a business, that would obviously take a -- be a bit of a step function (technical difficulty) comes down.

Otherwise, the downward -- the decline in Citi Holdings' expenses should pretty much track as the assets are coming off the books.

Can you update us on the attempts to sell CitiFinancial, since you brought up the potential for asset sales there?

Some of the press reports have indicated $13 billion, $14 billion of assets being discussed as part of that sale.

Is that about the right order of magnitude?

I am not going to comment on the press reports.

We did, as we mentioned earlier last year, restructure that business into a legacy portfolio it would be more likely that we would retain in any type of sale, and then an asset portfolio that really goes with the ongoing business.

So you are in the ballpark.

Okay.

Fair enough.

Then just a follow-up on the comments that you have made about FX driving a fairly meaningful portion of the expense structure increases.

That is fair; but should that have a comparable impact on the revenues?

Yes, absolutely.

When you take a look at FX impact overall, it not only has an impact on revenues.

Obviously it has got an impact on net credit losses as well.

So if you want to think about the net impact of FX on Citicorp, net of the impact on revenues, on expenses, on NCLs, FX changes added about $50 million of pretax earnings to Citicorp in the quarter.

Then if you take a look at Citigroup, when you factor in the FX impact on some of the international NCLs in Holdings and the expenses in Holdings it actually ends up being pretax neutral.

About neutral?

Okay.

Finally, let me just ask one more question which is -- if you can give us a sense for the costs that were carried in the P&L this quarter to account for litigation stemming from foreclosures and loan repurchase and all of the like.

Yes, we have never commented exactly on the exact amount of accruals that we put up for foreclosure litigation as a matter.

So that is not something that we have deliberately set aside.

When you take a look at mortgage repurchases, we did set aside an additional $122 million this quarter for mortgage repurchase reserves.

I think there is a page in the appendix of the supplement that -- page 29, that lays that out.

So we added $122 million to the reserve, and I think the reserve now stands at something like $940 million, $950 million.

Okay, great.

Thanks very much for answering the questions.

Not a problem.

James Mitchell, Buckingham Research.

Good morning, John.

Two questions.

Maybe one just on the DTA.

If I do the math it looks like you were essentially breakeven in North America.

Is it then fair to assume that the DTA was pretty flat or with reserve releases there was some decline?

How should we think about that?

James, Jim, the DTA actually came down $1 billion this quarter.

So the DTA reduced from $52 billion down to $51 billion.

And that probably comes right off the top in the Tier 1 Common, right?

Or the deduction gets shrunk, right?

Yes, in other words, the disallowed DTA against Tier 1 Common improved by roughly $1 billion, yes.

Okay, that's helpful.

Thanks.

Just on the asset transfer again, maybe thinking about it a different way.

Was it mostly, I guess, number one, mortgage-backed securities that were transferred?

Is it fair to assume that a lot of those or the majority of those were below investment grade, so we can kind of back into what the risk weighted asset benefit would be?

Yes, we laid out on page 35 -- I mean we didn't specify it completely.

But you can see how the securities that were under held-to-maturity accounting declined by $13 billion in the quarter; and the asset transfer was $12.7 billion.

No, no, right, understood.

But in the detail on trading assets you have corporate in there, you got auction rate securities, and you got mortgages.

Obviously those all have different risk weightings.

I am just trying to get a sense of how (multiple speakers)

I am saying, Jim, you can see on page 35 the declines in the HTM securities should give you -- so in other words, corporates came down -- corporate loans came down by $3.5 billion.

Right, okay.

Got you.

Prime and non-US MBS came down by $3.2 billion.

Alt-A came down by $4.6 billion.

Right, okay.

All right?

That should give you a pretty good picture as to what the components of the $12.7 billion were.

Right; and we can probably assume that the mortgage-backeds were in the highest risk weighted category?

That would not be a bad assumption.

Okay.

Fair enough.

All right.

Thanks a lot.

Ed Najarian, ISI Group.

Good morning.

Most of my questions have been answered, but just hopefully two more quick ones.

You talked about as you get into 2012 beginning to return capital.

I was just wondering if you could give us any sense of your desire to focus more on dividends or buybacks.

I am thinking with the stock around tangible book or under tangible book you would be very focused on buybacks.

But wondered what your sense of that is.

Well, let me take a crack at that, Ed.

I think over time we do want to get to some sort of a normalized dividend policy reflecting that we are really a higher growth bank than some of the -- or many other large banks.

So that is one goal we have got.

Secondly, I don't disagree with you.

With the stock trading below book value it becomes awfully interesting to think about share repurchases as well.

And I suspect depending upon the kind of regulatory clarity we get, that our approach would be a combination of the two.

It's a little early to talk about it, as we found out.

We have all found out we need to wait for clarity from regulators before we move.

But at this point, other than saying it's a combination of the two you can't give me a sense of a preference for one versus the other as you start to return capital?

Again, as I said to you, I think our preference would be to do both.

We want to all look at where the regulators come out.

I do think that there are -- when you look at the shareholder base and when you look at kind of the signaling aspect of what one does, you have got to be mindful that a dividend policy is also important.

Now I can't tell you that -- exactly how we will approach a normalized dividend policy yet.

But don't get me wrong; we completely appreciate the value of the stock.

And the fact it is trading below book value, that will be a significant influencer in our decision.

Okay, thanks.

Then just a quick follow-up.

We are seeing -- as we are seeing in the other big card banks -- we are seeing your credit card losses continue to come down very rapidly.

Both JPMorgan and BofA have given some outlook in terms of where they would expect card losses to go, say, over the next 12 months or on sort of a more normalized basis.

Are you willing to give us any sense of that?

How much more of a decline we might see in card losses?

Yes, obviously, we do believe that, assuming conditions stay where they are, credit losses should continue to improve.

We are probably looking where on a normalized basis you think about our cards business -- and I'm not going to tell you the time frame -- but branded cards should be somewhere in the 5%, 5.5% range.

Maybe a little bit higher than 5.5%; say 5.5% range.

Okay.

Anything on Partner Cards?

I am not totally focused as much on Partner Cards, quite frankly, since it is in Citi Holdings.

Right, okay.

Okay, that's helpful.

Thank you very much.

Chris Kotowski, Oppenheimer & Co.

Yes, I wonder in Asia and Latin America with a number of those economies raising interest rates and taking other steps to try to slow down what has been a very hot economy, your credit metrics still look good there.

We saw a little uptick the delinquencies in Latin America.

But is it your expectation overall that you end up with a soft Landing there, and then continued growth?

Or should one look for some significant deterioration in asset quality and portfolio loan growth slowdown in those markets?

No, we're not anticipating a crash-and-burn scenario in those economies.

There's a couple of them where they have got high inflation rates.

I think there is every evidence that the central bank in each of those countries is focused on that, and they are all enacting policies to contain the inflation impact along with trying to also continue to promote their growth.

There is a certain cycle that goes on in those economies.

We are in one of those cycles right now.

Don't also underestimate the reason why these economies are the way they are.

It is part of a something-is-working kind of story in the sense they are growing.

Consumer incomes are rising.

Consumers have more money to spend.

So understanding that growth and inflation have to be traded off in the right way, we are here because something underlying in these economies heading in the right direction.

And that is still our secular view.

Okay.

Then as a follow-up, just was there any major fallout in Japan from the tsunami and all the subsequent turmoil?

Is there any ongoing impact on your business?

Quite frankly, the impact on us was somewhat muted.

Now I mean the secondary effects I guess people are still trying to sort through.

But specific to us, we took some trading hits the first couple of days after the tragedy.

Those losses were pretty much recovered within a week or so.

The other significant impact that we saw -- in our CitiFinancial business in Japan we do have a mortgage portfolio.

We tried to isolate those mortgages that were located in the five prefectures that were most impacted by the tsunami.

So we put up an additional $55 million, $60 million worth of loan loss reserves against that.

We had some private equity investments that again are in Holdings that we are looking to sell down.

I think we took marks of maybe 30 to 40 on those things.

So overall in the quarter maybe $100 million worth of impact, all in Holdings.

Okay.

All right.

That's all for me.

Thank you.

Betsy Graseck, Morgan Stanley.

Hi.

A couple questions; one on the NIM.

Could you just give us a little bit of a sense as to how the NIM is trajecting in the EM versus the DM space?

You talk about the fact that there is inflation in the EM side.

How are you dealing with that?

Is that at all a net positive or a negative for you guys?

Betsy, I'm sorry, I really don't have it in my head as far as how NIM is going EM versus DM.

I apologize.

Well, I guess the broader question is, in the inflation-oriented economies where you are invested, are you seeing an opportunity or a challenge as it relates to the profitability of those businesses?

We actually see an opportunity.

As I said you can see the result of the investments that we have already begun to make in some of those countries as far as growth in loans and deposits.

All of that should point to the fact that revenues should be doing quite nicely.

The issue for us -- you can see in just about every one of our International Consumer businesses where we are benefiting, as I said, on increased investments and the improvement in drivers.

But each one of those businesses are contending with other factors at the present time that are tending to mitigate the impact of the drivers on the top line.

Latin America cards, for instance.

If you take a look at what is going on in Latin America cards, we do have lower spreads on the new business; and that has clearly had an impact on NIM.

Year-over-year our NIM in that business is down about 125 basis points.

But a larger impact on the revenue dynamics in Latin America cards really results from the fact that we are still experiencing the effects of a repositioning in our Mexico cards portfolio.

So Mexico parts represents about 40% of both our ANR and our revenue stream in Latin America cards.

Now, outside of Latin America cards revenues are increasing year-on-year at 20%, while within Mexico revenues have actually dropped 4% year-on-year.

ANR outside of Mexico in Latin America is growing at 19%, while Mexico cards ANR grew 1%.

Now we are actually encouraged by the fact that Mexico cards grew 1%.

It actually demonstrates that we are getting through that repositioning and so the impact of that repositioning is starting to abate.

As Mexico cards now begins to grow I think you are going to see a boost to the revenue growth in the region.

So volumes are beating spread, I guess, is the point.

Now I am just wondering from a NIM perspective as you indicated second quarter is going to be down a bit.

When do you see the inflection point there?

Is it going to be in the second half?

Because in the past you have talked about second-half NIM going up.

I would say that we are looking towards the second half of the year for NIM to stabilize.

Okay.

Then second thing is, on the 8% to 9% Common Tier 1 next year, in your commentary are you thinking about specific kind of actions?

Are specific actions included in your expectation that you are going to be at the 8% to 9%?

In other words are you incorporating into that comment things like CitiFinancial getting sold and other potential assets that you might have in the docket to be sold?

Or is that just from organic changes in the current business model?

Betsy, it basically reflects our continuing to execute along our plans.

Our plans include winding down Holdings in an economically rational fashion.

Great, okay.

Thanks.

Matt O'Connor, Deutsche Bank.

Hi, guys.

Today might not be the best day to talk about bringing down excess liquidity, just given some of the macro issues out there.

But you did mention it earlier again today.

I appreciate we don't even know what the liquidity rules are out there for you or for other banks.

But as you think about what you need in your opinion, maybe you could size what the excess liquidity is and what some of that opportunity might be going forward in terms of deploying.

Well, we have -- virtually 25% of our balance sheet is in some form of liquid assets, whether that be cash in the bank or highly liquid AFS securities.

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

We will have to see, again, how some of these rules clarify before I could tell you whether that is 5% too high, 10% too high.

But it's obviously higher than we would expect it to be right now.

That is a lot of cash that we can put to work.

And as we continue to grow the loan book in Citicorp, hopefully that is one good outlet.

Obviously as we continue to wind down Citi Holdings, Citi Holdings keeps on filling up our cash coffers.

So it is somewhat of a push and shove as far as trying to -- we want to get rid of Citi Holdings, but it is generating excess liquidity that we have got to find a place to put to work.

The other thing that you should start to see especially in the second half of this year, as we have said publicly, we are going to let a lot of our maturing debt just run off.

So in the second half of the year there is probably $15 billion or so of -- or maybe it is $12 billion -- of TLGP debt that we will just allow to run off.

So that will also be a way of siphoning off some of the excess cash.

Okay.

For all the NIM questions that we got, that is obviously slightly positive for the NIM as that debt rolls off, I would assume.

Yes, it is.

Then just separately, on the investment spend that you are doing in the core franchise, as we think beyond this year, is it still at an elevated pace?

Is it more of a normal pace?

How should we think about how much you are doing now versus how much needs to be done going forward?

Yes, we -- I'm not going to give you a specific answer, which is probably no surprise.

But it is going to be somewhat dependent on how successful we are being able to demonstrate the fact that we can actually tie the increased investment spending to revenue growth.

North America, I think you will see some -- North America Consumer, we will have heightened investment spending there compared to what we are doing.

You can certainly hear that in some of the public comments that have come out.

So it will be certainly at the levels that we can justify based upon the results that our investment spending that we made to date can justify.

Okay.

All right.

Thank you very much.

Richard Bove, Rochdale Securities.

I am a little confused as to where future earnings are going to come from.

62% of your revenue is coming from net interest income; and it looks to me like that is going to continue to decline, because you are indicating that earning assets and net interest margins are going down.

On the expense side it would appear, if you are going to have $48 billion to $50 billion, that you are looking at flat to up expenses.

So 62% of your revenues come down; your expenses go up slightly.

That squeezes you into getting future earnings out of noninterest income, which really brings you down to trading and probably reducing the reserve further.

So is that where the future earnings are going to come from -- trading and reducing, if you will, loan losses?

Or is there some other area of the bank which is going to be able to generate higher interest income?

Yes, somewhere along the line, Dick, I think I confused you and I apologize for that.

When you take a look at the future earnings, what you are going to see over the course -- certainly the next year, year and a half -- we are going to continue to wind down Citi Holdings.

Unfortunately Citi Holdings will be a drain on our income for a while, specifically on the revenue line.

As we continue to wind down those assets you are going to see reduced income from Citi Holdings' assets.

Now at the same point in time we are actively growing the earnings assets in Citicorp.

Again, loan growth in Citicorp, 10% year-over-year.

Loan growth in our Consumer business; in Latin America 17% year-over-year; loan growth in Asia 16% year-over-year.

So all of those are earning assets that you should start to see replacing the revenue, the interest revenue, that is being lost by Citi Holdings.

It is a matter of pacing as far as the rate of decline in one and the rate of growth in the other.

But we would actually think that over time the mix of our business is going to be more towards the model that Vikram laid out 2-plus years ago, which is roughly a third from Securities and Banking -- what you would I guess call trading; a third from the Consumer business; and then a third out of Services, called Services, Transaction Services, Private Bank, etc.

So that is the Citicorp that we are trying to grow, and I am sorry if I confused you.

No, no.

I understand.

But right now almost two-thirds of the revenue are coming from one source, and that is net interest income.

And from what I have heard I don't see how net interest margins are going to go up anytime soon.

If the, if you will, reduction in the size of Citi Holdings is equal to or greater than the increase in the loans from emerging markets, your earning assets are going to continue to decline.

So you've got a 15% year-over-year decline in net interest income; and at some point that number has simply got to go up or your earnings are not going to go up.

Yes, let's talk about two separate concepts.

Net interest revenue, gross dollars; and then net interest margin, percentage.

Net interest margin, as I said before, I think will say under pressure for at least the next quarter due to some factors, whether that is the continued spread compression that we are seeing; and also then I've got the FDIC additional assessments.

But then in answer to somebody else, net interest margin should look to stabilize.

That is the percentage.

Net interest revenue, -- and again I don't want to start forecasting net interest revenue.

But net interest revenue as we grow those loan volumes in Citicorp, as that growth, the absolute growth begins then to overtake the declines in the Citi Holdings assets, then you should start to see some growth even on the net interest line.

Okay.

Thank you.

Mike Mayo, CLSA.

Just some clarification on the OCI.

It went up a lot this quarter and that helped tangible book value.

What is the key driver there?

Should we expect similar volatility in OCI in the future?

Yes, Mike, two big drivers on OCI.

One is the asset transfer that I mentioned earlier.

All right?

That was $1.1 billion favorable impact to OCI.

Then the other significant impact on OCI would be cumulative translation adjustments, FAS 52 adjustments.

That probably benefited us about $0.04 in tangible book value.

Then a separate question.

Why are you guys doing the reverse stock split?

We all have our reasons why you might be doing it; but I am not sure we heard directly from you.

I think Mike, we were pretty clear in our public press releases and other communications.

We have got a couple of reasons.

One of them is that -- and you have got to talk about not only the stock split but also our intention in the second quarter to reinstate an -- albeit a nominal dividend.

And there are some clientele reasons.

One, there are a number of clients who can't buy stocks that are either $5 or $10 per share or below those.

And there are some who can't buy a stock without some dividend.

Those are sort of the obvious ones.

In addition to that, we do think that it could have an impact reducing volatility of the stock as the stock price is at a different level.

I would also tell you that post the reverse split both the number of shares outstanding and the stock price are closer to our peers.

Then lastly, S&P put on negative watch US government debt.

How you think about the potential implications of that change?

That would go to maybe the securities you have on your balance sheet or some other activities.

How do you think about protecting yourself?

Well, we're glad we're in 100-plus countries to start with, because there is a level of a diversification that goes with that.

In line with what our clients need, because what that says is that we really look at our entire balance sheet.

That is the first point.

The second point is that I haven't really looked at what S&P said this morning, so I don't really have any deeper insight against what we said.

But I would also tell you I have full confidence in our administrative and our legislative policies to get our country to the right place.

All right.

Thank you.

Carole Berger, Soleil Securities.

Good afternoon.

Bank of America took a charge on their MSRs this quarter citing the settlement with the regulators and the higher costs going forward for servicing.

I know you didn't discuss it.

But how do you view higher servicing costs?

Was there an embedded charge that was material or immaterial in the quarter?

Yes, Carole, we have taken a look at the consent order; and frankly we identified improvements that needed to be made in our mortgage servicing operation back in 2009.

So we are actively working on improving servicing dating back to the fourth quarter of that year.

As a matter of fact we had most of the improvements in place by February 2010.

Now the consent order does contain some additional things that we will have to address.

But as we have looked at the impact of the consent order, we have estimated that it will have about a $25 million to $30 million annual increase in expenses for us.

So really not that much, and we don't expect it to have much of an impact on our MSR asset.

What are you carrying your MSRs at now?

The cap rate I think is 1.15%.

We've got a mortgage servicing book of about $440 billion; so it's like $4.7 billion.

Thank you.

And you have no further questions at this time.

Great.

Thank you, everyone.

This is John Andrews again.

We appreciate the time you took this morning.

The call will be available on replay later this afternoon on the website.

Again, thanks.

Ladies and gentlemen, this concludes today's Citigroup earnings conference call.

You may now disconnect.