Citigroup Inc. (C) Earnings Call Transcript & Summary

Good afternoon or good morning, everyone. Thank you for joining us for the next presentation here at the BancAnalysts Association of Boston's Fall Conference. We're very pleased and privileged to have Citigroup as our participant. With us is Mike Verdeschi, who's the Treasurer of this global bank. As we all know, Citi is truly one of the United States' only global banks with over $2 trillion in assets, and obviously, in countries throughout the world. But with that, Mike, thank you for joining us today.

Thank you, [ Jon ]. Appreciate being invited and happy to be here today.

Great. As we look at the balance sheets of the banks in the United States this year, there's been robust deposit growth. Can you talk about the deposit growth that you're seeing so far and what it may look like for the remainder of the year?

Sure. As you know, the Fed appropriately increased liquidity in the system earlier this year to address the adverse market conditions caused by the virus outbreak and a large portion of the economy being shut down. They did so, of course, through their quantitative easing program, which entails the Fed buying securities. So the Fed took their balance sheet up by over $3 trillion in the last year, which also had effect of taking industry deposits up, call industry deposits up $2.7 trillion over the last year. And at this time, the Fed continues to add liquidity to the system. So they're purchasing securities in the neighborhood of $120 billion each month. So with that liquidity added to the system, we've certainly seen significant deposit growth and since the beginning of the year across our businesses, in part, reflecting the global platform for both our institutional and consumer franchises. We had strong growth across our regions in consumer, especially in North America, though, where we saw a continued momentum in both our traditional and digital channels. But also in the ICG, especially in TTS, we did see good deposit growth there as well, as client engagement remained quite high. So during the crisis period, call that beginning of March, our deposits grew by over $160 billion. Year-over-year, that's more in the range of $200 billion. And so to break down that $160 million for you, we raised, call it, $30 billion in consumer deposits, with another $10 billion in high net worth clients from the private bank. And of that remaining $120 billion of growth, roughly 60% of that came from corporates while 40% came from financial institutions. And this, by and large, 90% of the growth was driven by the deepening of our existing client relationships. So that split between consumer and institutional in terms of the growth we saw, looks a lot like the deposit composition that we have on the balance sheet. You talked about the deposits going forward. I do believe they're going to remain elevated. Keep in mind, as we're seeing these new deposits come in, they represent a deepening of the relationship with our clients and certainly the part of the execution of our strategy, but also as investors derisk their portfolios during the stress period and corporations who have bolstered their own liquidity positions through their own issuance activities. I mean we've seen record investment-grade issuance during some of those periods. Our client increased their levels of cash as well, and this has, of course, translated to higher deposits at Citi. So I mentioned the macro impact as well. That macro impact is both Fed policy, but there's also fiscal stimulus that contribute. So this stimulus obviously adds liquidity to the system. And as I mentioned, the Fed is still purchasing securities. So I do think the deposits in the system are going to remain elevated, and I believe ours will as well. One thing I would add, [ Gerard ], a lot of questions come up, too, about how do we think about the stability of those deposits? And of course, we evaluate those on a quantitative basis, looking at the activity around those deposits. But we also look at it on a qualitative basis as well through the ongoing dialogue we maintain with our clients around their needs and expectations for those funds. But lastly, I would say that our view on these deposits will evolve as we see economic activity and market conditions evolve, which ultimately will lead the Fed to unwinding quantitative easing. But I would expect this to be probably gradual and transparent, no different than how they unwound their less QE operations some years ago.

Mike, I just want to remind our participants that they're welcome to sending questions on the dashboard through the portal that they're listening to this presentation. Coming back to the Federal Reserve and the monetary policy driving deposits, which obviously is happening. If you had to say the other central banks around the world, is that an -- because you've got a unique lens for a bank here in the United States having a global footprint that you do. What do you see -- what kind of impact are those central banks having, do you think, on the deposits in -- outside the U.S. for Citigroup?

Sure. I think very much that same dynamic is in play. If you think about how that system works, as central banks are buying securities, they're putting liquidity into the system. And that liquidity in the system is going to make its way back to banks, largely in the form of deposits. And so it's a closed system. You put liquidity into the system, deposits are going to be elevated, and we've seen good deposit growth overseas as well. So I think a very similar dynamic plays out there. Of course, the Fed really had its foot on the accelerator earlier this year and continues. And I think the -- we're seeing that effect perhaps more pronounced in the U.S.

Yes. No doubt, it's been staggering, the liquidity, as you mentioned, that's been built up. Do you have a sense -- and you touched on this in your opening remarks, which were really quite thorough. What is it going to take for the corporates to gain more confidence that they don't have to carry as much liquidity as they are doing now? Do you have any suggestions on what you're looking for to see what may make that change?

No, it's interesting. And I'll go back to sort of the macro picture for a second. The Fed, I don't want to say they're thinking about fiscal policy as entirely a function on their own actions, right? They have their own mandates and they're focused on that, but they certainly have encouraged fiscal stimulus as well. That being said, whether you have that fiscal stimulus, I do think post-election, whatever government, whether it's divided or however the shapes up, I think there will be some fiscal stimulus. I think you're also seeing a very resilient economy playing out. The unemployment level printed this morning at 6.9%, which was much better. So I think the combination of fiscal stimulus, I think the combination of Fed remaining accommodative, I think, will continue to improve those economic conditions. Of course, the trajectory of the virus is going to be perhaps the most meaningful part. But I do think there's sufficient stimulus that will give the broader economy some confidence. But it's hard to know exactly the levels that folks may maintain. I do think, though, as long as those deposits and liquidity remain elevated in the system, it's somewhat of a -- it's a closed system. So even if we see some clients beginning to deploy that, it's only going to go into a different part of the system and remain sort of back on the bank balance sheet in some form.

Yes, no doubt. No doubt. Maybe you can talk to us about the funding mix. When you look at your funding mix, how it shaped up this year and how you see it evolving in 2021.

Sure. So clearly, for this year, heavily, heavily weighted towards deposits. And as I said, over the past year, that number is in the neighborhood of $200 billion, which clearly far exceeded our need. Typically in the bank, I would also maintain multiple levers just to have an ability to access the market when needed. And what I would say, wholesale in the bank this year has largely been flat. And at the beginning of the year, I indicated that we would go to the market with roughly $25 billion of debt issuance between some combination of the bank and the non-bank. But with that deposit growth that we've seen, we've not issued anything out of our bank note program this year. In the nonbank, we've done $20 billion of benchmark debt. And as I mentioned last week on the fixed income investor review, $20 billion is the range that we think is appropriate for the year. But I also talked about maintaining some flexibility around that number. But looking ahead, the bank entities, I think, are clearly flush with liquidity from those deposits. So we'll have to see how that balance sheet evolves and loan growth picks up. But clearly, we have ample deposits there to cover that. And I think in the nonbank, our issuance activity is going to really depend on the evolution of the balance sheet, the client needs and, of course, we do like to remain opportunistic around our issuance activity, and that's going to be influenced by good demand or an opportunity to diversify. Some of the things I talked about last week as well is looking at TLAC. And so TLAC also is part of what informs our issuance of our nonbank benchmark program. So I think at this point, very good levels of liquidity, but we'll just have to see how that balance sheet evolves over time.

I see. And then when you look at that balance sheet and you look at the actions you've taken in your securities portfolio this year, and particularly in light of the deposit growth and where rates are today, how is that evolving? And can you also tie that into, do you have different approaches for different countries? Again, you're unique in this global lens that you have. Are you looking at the U.K. or Asia differently than the United States?

Sure. First, I would mention, when it comes to the securities portfolios, there's really multiple ways to look at it, but there's 3 that I would point out. And first and foremost, that portfolio, that securities portfolio is a liquidity portfolio. It's a store of liquidity. And therefore, it's part of the liquidity cushion that we maintain to withstand stress conditions. Secondly, it's a tool to manage our overall interest rate exposure for the firm. And then third, given the balance sheet, cash and securities probably comprise over 30% now of our balance sheet. We use those securities to generate some return as well. So our broad strategy around the portfolio for the last couple of years has basically been to stay liquid and use those securities to bring down our interest rate exposure for the firm in U.S. dollars. And we began doing that as we saw the yield curve trending flatter, indicating a change, certainly in the rate cycle but perhaps the economic cycle as well. So our allocation over the last year, call it, increased securities by roughly $90 billion. 80% of that went into U.S. treasuries, again, to help us reduce that interest rate risk sensitivity. We also added agency MBS as well. Again, that's a good returning liquid asset. That allocation turned out to only be 10%, but that is a function of we did see some of that portfolio prepay, given the very low levels of rates that we've now gotten to. We've also added foreign sovereign. So you asked about the foreign sovereign portfolio. We did add foreign sovereigns. And again, that has been a function of taking in those deposits overseas, doing the very same things. Maintaining liquidity in those countries, but also managing that interest rate risk profile. So we did add foreign sovereigns as well. But of course, there's multiple things that we'll think about. Our -- clearly, the weighting is to the dollar products and the highly liquid products. Some of those countries that we operate in, of course, we're going to look at those bond portfolios, and we're going to want to make sure that they're sufficiently liquid. So there are certainly things that we would look at in certain smaller countries to make sure the liquidity profile would meet what we require. But I would say, if you look broadly at Asia, Europe, North America, you're going to see a lot of the same principles that drive our allocation. So again, those are some of the things that we think about as we perform that asset allocation within that portfolio.

Mike, from the treasurer's viewpoint, your eyes, what would you say is an optimal level of securities and cash for you that really would kind of maximize but at the same time, not put you at risk for not having enough liquidity, but maximize revenue gen? Have any thoughts around that?

The answer is that, to me, there's no one answer to give you that exact number. And the reason for that is what's informing your need to carry that level of liquidity on your balance sheet. And part of that is informed by the deposit composition and what assumptions you make on those deposits. And therefore, how much of those deposits are lendable for loans or other illiquid assets versus what portion of that deposit would you rather or need to keep in some liquid asset in case you have a stress, and you see an outflow of that deposit. So clearly, the balance sheet that you want, you want a balance sheet that is really ensuring you have safety and soundness. At the same time, you want a balance sheet that's robust and supporting our client needs. And so that composition of deposits to loans is something that we focus on, but that liquidity component is really going to be informed by the composition of that balance sheet.

You're speaking of deposits. And obviously, Citi has got a great brand, particularly, your credit card is well known. How much do you think the brand recognition? You talked about the growth in deposits in the opening part of this conversation, do you think the brand has helped with that growth because people do recognize that it is a good brand?

I really do. I mean when I think about our strategy, I think there's a number of things that enable us to attract those deposits. And certainly, it's a great brand globally. And so I do think when -- especially as you saw COVID and -- unfold in Asia first, you did see sort of that flight to quality. And I do think a lot of that is the brand recognition. But I also think part of our strategy, especially in our consumer bank, is to drive that digital capability and access to our clients broadly through those digital means. And I think while we don't have sort of the branches that necessarily some of the peers do, we certainly have that name recognition. We certainly have the digital capabilities. I think that combination means that we've been quite good at raising deposits both globally but also domestically through our consumer channels as well.

And if I recall, obviously, you've got the joint venture with Google. Does -- that goes live '21 next year? Is that correct?

Yes. I don't know if we've put out an exact time line on that soon enough.

Yes. Okay. No. It ties into your comments about the brand and the digitalization of not having to have branches and just another channel, obviously, that you guys can pursue. So thank you. When you look at the third quarter numbers, and you look at the net interest revenue and the net interest margin, can you share with us what drove those numbers and drove the margin to where it ended up in the third quarter?

Sure. And as we noted on the earnings call, we saw a decline in net interest revenue year-over-year in the third quarter, reflecting the impact of lower rates and lower loan balances. This was partially offset by higher trading-related net interest revenue. Of course, as we've seen that source of revenue pick up this year. And on a sequential basis, net interest revenue declined as well in the third quarter, again, driven by lower loan balances, but we also did see lower trading near, sequentially, again, coming off some of those heightened levels at the peak of the market volatility. And we also did see the net interest margin decline, reflecting lower net interest revenues, too.

When you look out over the -- obviously, we got 1 month on already in the fourth quarter. What is your net interest revenue outlook for the fourth quarter?

Sure. So we expect the same dynamics that I just mentioned to continue to be a factor in the fourth quarter as well. We're expecting net interest revenues to be down year-over-year. Again, reflecting the impact of lower rates and continued lower levels of activity that we've been seeing related to COVID-19. Sequentially, we expect near to stabilize relative to the third quarter. And this is reflecting the improvement in macroeconomic factors such as unemployment and GDP. And I mentioned the unemployment number continues to, I think, improve at a faster rate than some of those surveys. So -- and with that, also, I would note that we've seen sequential improvement that we're expecting in purchase sales. So early in the fourth quarter, we've seen some improvement there. So from a full year perspective, we've said that we expect revenues to be roughly flat with the decline in net interest revenues being more or less offset by the noninterest revenues. And this is all consistent with how we talked about it a few weeks ago in earnings.

When you're managing your balance sheet, it's very challenging in this low rate environment with asset sensitivity and the issues that you and your peers are confronting. If rates -- I don't expect negative rates in this country. But how sensitive are you guys if rates -- I don't know how much lower they can go at the front end of the curve, but without going negative. But any thoughts there?

So it's a good question. I mean now that you're at that 0 bound, despite what the Fed said, I do still expect people to talk about negative rates and how you think about planning for that. And first, I would note, at least what the Fed has said on this is even before they lowered rates in response to this latest crisis, is that they would first take interest rates down, they would provide forward guidance, and then lastly, they would do securities purchases through quantitative easing. And they did exactly that. And so now that we see those low levels of rates, you can't rule out other things that the Fed would still perhaps do before taking rates negative. And that could be increasing the volume of quantitative easing or even moving the securities purchases further out on the curve or going to other asset classes. So I think there's a lot -- I think there's still things in their toolbox that they would use before considering negative rates seriously. But look, negative rates, we do have negative rates in parts of the world and in parts of the world where we operate. And so some of the things that we do need to think about is obviously the repricing flexibility around deposits. So for example, here in the U.S., we are much more weighted towards our Institutional Clients Group deposit sourcing rather than consumer. And in our ICG, you do have the flexibility to take rates negative, and we've seen that dynamic play out in Europe as well. Doesn't mean you will. Obviously, you've got to evaluate your overall client relationship. But is there a dynamic there between the rate you pay or charge in this case versus your broader relationship and, for example, fee income. And then on our consumer side, you do have the impact of that floor, given you can take consumer deposit rates below that 0 floor. So there are things, of course, that we think about that can play out in that deposit pricing. But on the asset side, too, you want to be thoughtful about, do you have a floor in that asset pricing related to some of your loan activity. But I also think, importantly, as I talked about this earlier, is managing that interest rate risk sensitivity down, and we've done that over the last couple of years. And so deploying those securities in a way that give you that interest rate protection when rates are falling. So we think of all of those things. And as I said, we've operated like this overseas and pretty much the same thought process here for the U.S. But I don't think the Fed is quite ready to seriously consider negative rates quite yet. I think they certainly do urge fiscal stimulus, and I think we will get some sort of fiscal stimulus and maybe that even steepens out the curve. So I think the Fed will like to see how that all plays out before seriously considering negative rates.