Citigroup Inc. (C) Earnings Call Transcript & Summary

Hello and welcome to Citi's fixed income investor review with Chief Financial Officer, Mark Mason; and Treasurer, Mike Verdeschi. Today's call will be hosted by Tom Rogers, Head of Fixed Income Investor Relations. [Operator Instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Mr. Rogers, you may begin.

Thank you, Natalia. Good morning and thank you all for joining us. As Natalia mentioned, I'm joined this morning by our Chief Financial Officer, Mark Mason; and our Treasurer, Mike Verdeschi. In a moment, Mike will take you through the fixed income investor presentation, which is available for download on our website, citigroup.com. Afterwards, Mark and Mike will be happy to answer your questions. Before we get started, I'd 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 and capital and other financial condition may differ materially from these statements due to a variety of factors, including the cautionary statements referenced in our discussion today and those included in our SEC filings, including, without limitation, the Risk Factors section of our 2019 Form 10-K. With that said, let me turn it over to Mike.

Thank you, Tom, and good morning, everyone. On today's call, I will cover a number of topics. First, I'll briefly discuss our operating results for the first half of 2020. Second, I will cover recent balance sheet trends, including growth in loans and deposits. Third, I'll review our issuance program. And finally, I'll discuss our continued strong liquidity and capital position. Slide 3 summarizes our results for the second quarter and first half of 2020. In the first half of the year, we reported net income of $3.8 billion, which included a $10.5 billion increase in credit reserves under the CECL framework, primarily reflecting a deterioration in the economic outlook since the beginning of the year as well as downgrades in the corporate loan portfolio. On Slide 4, we show average balance sheet trends over the past 5 quarters in constant dollars. On this basis, we have grown our balance sheet by approximately 15% over the last year as we continued to support our consumer and institutional clients as they managed through the COVID-19 health crisis while also maintaining a strong balance sheet. We saw strong growth in deposits across both GCB and ICG. Loans grew driven by our institutional business. Trading-related assets and liabilities grew, reflecting a continuation of the heightened client activity we saw in the first quarter. And long-term debt increased as we built liquidity to support our clients and maintain the firm's robust liquidity profile. Slide 5 presents trends in our loan portfolio on an average basis in constant dollars. Total Citigroup loans increased 5% year-over-year. In our consumer franchise, average loans declined 1% year-over-year, reflecting the impact of lower consumer spending activity in our cards business across regions. In our institutional franchise, average loans grew 11% year-over-year. Average loans in Corporate Lending grew 21% as we continued to provide new loans and facilitate additional draws for clients looking to bolster liquidity. However, on an end-of-period basis, loans in Corporate Lending declined 12% from the first quarter, reflecting significant repayments as we assisted our clients in accessing the capital markets. And loans included in Corp/Other continued to decline driven by the wind-down of legacy assets. On Slide 6, we show credit quality trends in our GCB and ICG loan portfolios. In GCB, credit loss rates generally trended upward this quarter as a result of the macroeconomic slowdown, though this was much more a function of the lower loan balances as it is still too early to see a pronounced impact from COVID-19 on our net credit losses. In ICG, nonaccrual loans increased $1.5 billion sequentially, reflecting the current environment, with roughly half of the increase coming from smaller-sized exposures. However, on a relative basis, NALs remained low at 99 basis points of total corporate loans. Turning to Slide 7. We show trends in average deposits over the past 5 quarters in constant dollars. Total deposits increased 21% from the prior year period, reflecting client engagement and a flight to quality, so to speak, across both our institutional and consumer businesses. In our consumer business, deposit growth accelerated to 12% with strong growth across all regions. In North America, deposits grew 14% driven by a combination of factors, including the delay of tax payments, stimulus payments and reductions in overall spending as well as our continued strategic efforts to drive organic growth. In our institutional business, deposits grew 25% on an average basis primarily driven by 30% growth in TTS as well as continued growth in Private Bank and Securities Services. Now let me cover our parent benchmark debt issuance program on Slide 8. So far this year, we have issued approximately $18 billion of parent-level benchmark debt across a variety of tenors. Going forward, we'll continue to maintain the flexibility to issue a mix of tenors, currencies and structures as we prudently manage the liquidity profile of the firm and support our clients. On Slide 9, let me cover our issuance, maturity and redemption expectations. In 2020, we continue to expect gross issuance of approximately $25 billion inclusive of our parent benchmark and bank-level programs, including the roughly $18 billion we've issued so far this year. Given the strong deposit growth we've seen at the bank, we expect the majority, if not all, of our second half issuance to be out of the parent. And we will continue to be flexible around optimizing our funding through opportunistic redemptions. On Slide 10, we show the composition of our long-term debt outstanding. During the second quarter, our total long-term debt increased by approximately $14 billion to $280 billion driven by parent benchmark and customer-related debt issuance as our bank-level debt declined given strong deposit growth. On Slide 11, we provide an update of our LCR metrics and drivers. Our average LCR increased modestly to 117% this quarter. Turning to Slide 12. Let me summarize our key regulatory capital metrics. Our CET1 capital ratio increased to 11.5%, primarily reflecting a decline in risk-weighted assets. And our SLRs were 6.7% and 6.6% for Citigroup and Citibank, respectively. Moving to our last slide. Let me summarize several key points. The franchise performed well through the first half of the year. We earned $3.8 billion of net income year-to-date, including a $10.5 billion increase in credit reserves. We maintained a strong capital position with a CET1 capital ratio of 11.5%, an SLR of 6.7% and a surplus above our TLAC requirements. And we also maintained a strong liquidity position with an average LCR of 117%, $900 billion of available liquidity resources, and we expect to be in compliance with the NSFR when the rule is effective. It's this strong capital and liquidity that positions us well for a range of scenarios, from a persistent downturn to a stronger-than-expected recovery. And we have the flexibility to deploy these resources in ways that deepen and expand our client relationships and support the broader recovery. Before we move on to Q&A, let me touch briefly on LIBOR. Broadly speaking, we are continuing to prepare for the transition away from LIBOR by the end of 2021 by working with our regulators and various industry working groups as well as through the work streams we've established within Citi. With regard to the unique language in the subset of our preferred securities, while we are continuing to make progress in evaluating alternatives, we are not yet in a position to speak to a specific transaction or timing. And with that, Mark and I will be happy to answer your questions.

[Operator Instructions] Your first question is from the line of Arnold Kakuda with Bloomberg Intelligence.

So Citigroup, so you've been a stress test winner this year. Congratulations. Many years of hard work. And I think maybe this is one of the first times that I think your losses were less than peers'. So it seems like the trading losses especially were better than peers'. And you had targeted an SCB of 3%. And since you did so well, your SCB actually is 2.5%. So you have that on the one hand. And then yet, your bonds trade on a wider end than peers. So what do you think may be underappreciated by the market compared to the hard work that you've done with the Fed and how you've done in those stress tests this year?

Yes. One -- first of all, thank you. Look, I appreciate the commentary around the performance. The SCB did come in, as you pointed out, at about 2.5%. And that puts us, when you look at our CET1 ratio, at about a 10% minimum. And as we've stated before, we've run -- we're running currently, for the second quarter, at 11.5%. And there's a lot that goes into the scenario, but we think that certainly is a good and favorable outcome. There's still a lot of uncertainty in the market more broadly as it relates to the crisis that we're managing through. And I think that uncertainty plays straight across the board from this being a health crisis and there being a lack of clarity as to when a vaccine and a resolution comes into play to what is the ultimate impact on losses as we all build lifetime reserves for the first time with this new accounting change. And so I think part of the uncertainty that's out there that relates to us is investors seeing how we manage through this particular crisis. With that said, as you point out, I feel good about our capital position. I feel good about our liquidity position. I feel good about the performance that we've demonstrated through the half and being able to support our clients through this crisis. The level of engagement that we have with clients has been very strong. We're a very different firm than we were during the last crisis, and you can see that when you look at the mix of our credit card portfolio. You could see that with the discipline that we've managed in terms of our focus on our corporate clients. And while we won't be without losses through this crisis, we feel good about the forward look and our ability to continue to manage it in a responsible way and to be there for our clients. And hopefully, when that all plays through, there'll be greater transparency and understanding of the strength of the franchise and the discipline that we've demonstrated. Mike, I don't know if you want to add anything to that.

No, Mark. I think that's it. I mean obviously, we've been continuing to issue well. And I know there's comment on the bond spreads but good sponsorship from the investor community around that.

Yes. Yes.

Okay. Great. And then talking about the uncertainty ahead, and you've had a strong reserve build, $10.5 billion over the first half of the year. And then I guess in the first quarter, it was more on the consumer side, in the cards. Second quarter, it was more tilted toward ICG. But going forward, I mean, I guess nobody has a crystal ball, but which -- consumer or wholesale, which one do you think might be more of a problem area going forward? Or is it all kind of dependent on the stimulus and path of the pandemic? Do you have a thought in terms of which one, I guess, might be more of a concern in your eyes?

Yes. Look, as you would imagine, we're focused on our entire portfolio and exposures on both the consumer side as well as the institutional side. Our reserves today sit at $28.5 billion. They've doubled since the end of 2019. We did see, as you point out, an increase on the corporate side. And frankly, as we've seen the crisis continue to evolve through and into the second quarter, that's really, in a way, a by-product of that evolution and downgrades and the like, putting us in a position to increase the reserves on the corporate side. With that said, as you know, this is tied to our economic outlook and forecast for how this continues to play out and what the pace of recovery looks like. And that's going to be an important factor as to how those reserves evolve and, frankly, how losses play through the P&L in the subsequent quarters. And so we're focused on it. We feel good about the reserve levels that we have to date. We feel good about the exposures we have given the discipline around how we've underwritten our corporate client exposures and the focus that we have on the higher-quality consumer portfolio. And subject to how the economic forecast plays out, that will be an important determinant in how the evolution of reserves and losses evolve.

Your next question is from the line of Nikhil Khosla with JPMorgan.

I hope everyone is staying safe. Two questions. First, on the GSIB scores. Clearly, the balance sheet has shown a substantial growth. And reading the last regulatory filings, OTC derivatives, cross-jurisdictional exposures, level 3 assets seem to be going up across the industry. So I just wanted to understand, how -- can you just talk to managing, balancing client needs versus potential increase in the GSIB surcharge? And does being at the lower end of the SCB scale, so a good job there, afford you a little more headroom maybe on the GSIB side?

Yes. Sure. So look, I mean, we all have to remind each other, and that's probably not hard to do, that we're managing through a crisis. And as we're doing that, as you would have heard me say before, it's important for us to continue to demonstrate balance sheet strength and -- both as it relates to liquidity as well as, as it relates to our capital. And there is a lot of liquidity that's in the market at this point as firms have shored up their liquidity positions but also as consumers have seen the impact of stimulus and forbearance and the like. And so as a result, we have seen our balance sheet grow. We -- Mike would have mentioned in his prepared remarks, the growth in the deposit levels that we've seen through the quarter and through the half. And we have seen pressure on that GSIB score. We've seen pressure in the past. I think the industry has. I think we'll have to manage through the balance of this year, and we're constantly looking at the drivers of that. We'll continue to focus on complexity, which is an important factor, size and the cross-jurisdictional components of the score and manage that particularly through size and mix of our balance sheet with an emphasis on deposits and trading assets. But again, we're focused on the safety and soundness. We're focused on being there for our clients. And the final point I'd make on this is one you alluded to. When you look at our CET1 stack, as was already pointed out, we have a 2.5% stress capital buffer at this point. We were estimating for another 50 basis points, and so there is a little bit of room and latitude there. But again, we'll deal with that as we need to. In the meantime, we're focused on all the things that I've mentioned through the course of the remainder of the year.

Great. And a follow-up on the card portfolio. Are you seeing any discernible changes in customer behavior this time around versus, say, the '08 crisis or prior recessions, maybe customers choosing to pay down card balances over some other loans or borrowings as cards probably are more important today in this digital world? So any comments there?

Yes. What I'd say there is -- I'd point back to one of my earlier comments in that we're, in many ways, a very different firm than we were as we come through this crisis versus the prior. And that is particularly the case when you look at both our consumer as well as our institutional portfolio. And I've spoken before around how the mix of our cards portfolio in the way of FICO scores has evolved since the prior crisis. I think that -- so you've got a different portfolio, so to speak, in terms of the quality of it, combined with a different crisis, right? And so -- and this crisis, for all the reasons we pointed to already, is quite different from the last. It started as a health crisis. It's evolved certainly to an economic crisis. But there's also the stimulus and the forbearance actions and all of those types of relief that have played into it, and we have to see how that evolves and plays out over time. And there's talk of even yet incremental relief as we're currently managing through it that has caused different behaviors. And so you've heard me reference the number of customers who have opted into some of these forbearance programs. You've heard me reference kind of half of them coming off, particularly in the U.S., and 80% of them still making payments. And so those types of behaviors, in some ways, are different from prior crisis. This one is far from being over. And as I've mentioned, there remains uncertainty. And so we'll have to see whether those positive signs -- how they ultimately play out. But we are seeing some different behaviors given it is a different crisis and we do have a different portfolio, and some of that has been certainly positive signs.

Your next question is from the line of Hima Inguva with the Bank of America.

So my first question is basically on pref issuance and redemptions, considering your SCB results that came out. Just wanted to know, considering everything, how you're thinking about that for this year and then going forward. And then I'll follow up with another question.

Sure, Hima. So no real change in how we approach the pref question. We're running close to that 150 basis points of RWA that I've talked about in the past. So that level remains relevant, in addition to other factors such as how our balance sheet may evolve and taking into account the environment that we're operating in. Then we'll evaluate those calls that are coming due first based on the need for that capital. And assuming that we did need it, then we'll look at the economics associated with simply leaving that security outstanding versus calling it and then replacing it. So the very same approach that we've been talking about. But I think, obviously, as Mark talked about, a period of uncertainty. We do have to evaluate how that balance sheet may evolve over time.

Okay. Great. Got it. And then the next one is on subordinated debt, and I know I've been asking this question for many times in the call. The reason I'm asking that again is, again, because we are living in a very different environment. And considering your macroeconomic outlook, any risks there? If you see a change in the way you think about need for issuing subordinated debt.

I'm sorry, Hima. I couldn't make out the last part of your question. Can you repeat it, please?

Oh, I'm sorry. Yes. Question is around need to issue sub debt. If you see a reason or opportunity to issue subordinated debt going forward. I'm so sorry, was that clear?

Yes. That's clear. So even there, I've talked about a level of around 200 basis points of RWA, and we've been running well in excess of that level. And even when you look at the breakdown of that, it is something that we've been paying attention to, the sub debt securities alone have us a bit over that 200 basis points. But as we've added reserves, that's now added another, call it, 40 basis points or so. So we -- we're well in excess of the level that we had targeted. So I would still say same answer, that there's really no need for that additional issuance at this time. But again, we never want to say never. We'll always talk about remaining opportunistic and evaluating where there's opportunities. But I would note that we're well in excess of that targeted range.

Your next question is from the line of Robert Smalley with UBS.

A couple of questions on issuance also. You said you've done $18 billion to $25 billion, majority, if not the remainder, from the holdco. When I look back last year versus this year, you're running about a $9 billion surplus -- excuse me, increase to the surplus that you ran last year. Is there a reason for that? When I'm looking at TLAC that's coming off, I'm seeing maturities from the second half of next year coming into this -- coming in now. So there's a lot of disqualification but no -- but I really don't see a lot of callable debt between now and the end of the year. So does that inform your thinking at all? And I also just wanted to ask on a separate note if you could talk a little bit about what's going on in Mexico in terms of the economy, how that's impacting your portfolio and how that stands out versus the general economy in Mexico and what you're doing to insulate yourselves there.

Sure. So I'll take that first question around the issuance. And just to give some broader perspective on it, first starting with the bank. If you go back to the beginning of the year, our expectation was that we would be in and around $25 billion of issuance and some combination of bank and nonbank. And of course, with the great deposit growth that we've seen over and above what we've needed for loans, we've just not had that need to issue out of the bank at this point. And so we -- as you noted, we definitely weighted it towards the nonbank issuance. And when you think about that nonbank issuance, we're in a good position right now. We've seen an increase in our LCR. Our TLAC buffer, I've talked about a range of $7 billion to $8 billion. Even as we went into the year, that was probably double that targeted range in terms of what we had as a surplus. And now, of course, we're looking at $30-plus billion of that TLAC surplus. But -- so what are the things that we're looking at? We are obviously going to be mindful that, that TLAC will decay in, call it, maybe $10 billion over the remainder of the year. Another thing I'll be looking at is that leverage relief that will be expiring at the end of the first quarter. And again, these things are out there a bit. We certainly have some time. So we do have the flexibility around our issuance program. But that being said, we've always talked about being opportunistic. We'll evaluate what our investor preferences are. We'll be evaluating how spreads are performing. And so we certainly leave ourselves room to continue to issue despite being in a favorable position from that TLAC as well as from that liquidity perspective. And Mark, maybe on the...

And -- yes, let me...

Before -- on the back of that question, just a quick follow-up. Any reason that you haven't done a 30-year lately like most of your peers have?

No. You know what? I think there's no real reason for that. I think clearly, what you saw us do early in the crisis is we did issue longer term. We did that 20-year transaction. That really was a function of the front end of the curve being dislocated. So we did have a preference to issue further out on the curve as we did 10- and 20-year. But really, it's just going to be a function of what our needs are and where our investor demand is. So we'll always look at the 30-year as well and see if there's a need out there and what that client -- what that investor preference may be. But hard to know exactly what those plans may be over the rest of the year. We'll be evaluating opportunities, as I mentioned earlier.

Okay. Sorry to interrupt on the Mexico.

No. That's quite all right. And I think Mike -- I was going to add one point. I think Mike hit it, which is this is obviously an ongoing assessment of our needs, and we try to be opportunistic as it makes sense to do so. With regard to Mexico, let me make a couple of comments. I mean one, I just would point out that we have a very strong franchise and position in Mexico. And across many products that we offer, we're #1 or #2, whether you looked at deposits or lending products, et cetera, et cetera. And we've been very disciplined around the target market clients that we've been focused on. And as you know, we've made a considerable amount of investment into our franchise over the past couple of years, and that's investment in kind of building out some of our branches but, more -- equally important, kind of enhancing our digital capability and our mobile offering, which in a time like this is certainly proving to pay dividends. As you point out, there's certainly GDP contraction that's going on in Mexico. It's undeniable. There's a slowdown in industry volumes that, in many ways, are exacerbated by the COVID-19 situation, and we're seeing cases grow, and unemployment is likely to increase. And so as a result, we're watching the macro very closely. We've put assistance programs in place for our cards customers, for our mortgage customers, for our personal loan and payroll loan customers as well as small business banking, and those include deferrals of minimum payments and temporary rate reductions and fee waivers and the like. I'd point you to we do -- we are seeing kind of a flight to quality as it relates to deposits. Our deposits have grown in Mexico both on the consumer side, which are up about 9%, as well as the institutional side, which -- deposits there are up about 20%. And so continued client engagement, which I think is very important, but we've seen that through this crisis. And then I'd also mention that when you look at our exposure in Mexico, it's important to put that in context. And so we've got about $31 billion of kind of funded exposure as of the end of the second quarter across both the GCB and the ICG. That's, call it, roughly 5 percentage points, if you will, of our total loans. About $13 billion of that are consumer loans. About $18 billion are corporate loans. And when we look at the consumer loans, 56% is in cards and personal loans. And there, we're targeting a higher-quality customer segment, certainly higher than many of our local peers, and they're priced accordingly, and a higher percentage of transactor clients. And 80% of our payroll loans are concentrated in sectors that have a lower risk of layoffs. So think about government employees and pensioners, and think about that in the context of my earlier point around rising unemployment. And another 25% of the portfolio is in mortgages, for example. And in our mortgage portfolio, there's an average LTV of less than 50%. So again, focused on high-quality customers but also structuring the portfolio to manage the risk accordingly. On the corporate side, that $18 billion, roughly half of those loans are basically a traditional Corporate Lending book. And so those are the large Mexican companies and subsidiaries of large multinationals that domicile outside of Mexico. So again, staying core and true to our strategy, a large percentage being investment grade. And roughly 40% of the corporate loan portfolio has a maturity that's less than a year. And so I highlight those dynamics to not only support the idea that we do have a strong franchise, but we have a high-quality franchise. That doesn't mean that it's not without -- or that it's without risk, but we feel good about the reserve levels that we've built, and we'll continue to kind of manage that very closely. And our view is that longer term, we continue to be optimistic about the opportunities in Mexico just given the competitive labor markets, given the continued expansion of its middle class, given the underpenetrated banking sector and, in particular, our corporate clients as they begin to reevaluate and reposition their supply chains coming out of this crisis. And so I think there are a number of things to highlight there, which I feel like I've done, but it's not without risk, but we're managing that very, very closely.

Your next question is from the line of Brian Monteleone with Barclays.